2006 ANNUAL REPORT
78151_cvr.indd 1 4/30/07 12:56:02 PM 2006 TOTAL REVENUES FY ENDING DEC. 31, 2004 2005 2006 2006 NET CASH PROVIDED BY OPERATING ACTIVITIES
REVENUES Products $98.6 $120.4 $160.4 MILLION Professional Services $12.8 $15.3 $22.7 MILLION TOTAL REVENUES $111.4 $137.5 $183.1 $183.1
OPERATING EXPENSES Cost of Product Revenues $25.9 $29.6 $39.6 Cost of Professional Services Revenues $8.0 $10.2 $16.0 $39.8 Research & Development $13.7 $13.9 $27.2 $32.7 Sales & Marketing $35.2 $37.9 $58.3 General & Administrative $15.1 $19.3 $35.8 Amortization of Intangibles Resulting from Acquisitions $3.5 $0.3 $18.0 TOTAL OPERATING EXPENSES $101.4 $111.2 $194.9 $137.5
INCOME (LOSS) FROM OPERATIONS $10.0 $24.4 ($11.8)
NET INCOME (LOSS) $10.0 $41.9 ($10.7) 0 2004 2005 2006 NET CASH PROVIDED BY OPERATING ACTIVITIES $32.7 $39.8 $22.9 MISSION $111.4
To enable educational innovations everywhere by connecting people and technology. ($22.9) 0 2004 2005 2006
NET CASH PROVIDED BY TOTAL REVENUES ($ IN MILLIONS) VISION OPERATING ACTIVITIES ($ IN MILLIONS) 2006 TOTAL REVENUES FY ENDING DEC. 31, 2004 2005 2006 2006 TOTAL REVENUE2006 NETS CASH PROVIDED BY OPERATING ACTIVITIES FY ENDING DEC. 31, 2004 2005 2006 2006 NET CASH PROVIDED BY OPEROurATING role ACTIVITIES is to improve the educational experience with Internet-enabled technology that connects students, faculty, researchers and the REVENUES community in a growing network of education environments dedicated to better communication, commerce, collaboration and content. Products $98.6 $120.4 $160.4 REVENUES MILLION Professional Services $12.8 $15.3 $22.7 Products $98.6 $120.4 $160.4 MILLION MILLION TOTAL REVENUES Blackboard’s$111.4 large and$137.5 diverse $1community83.1 of practice supports, enhances and extends our offerings every day, all over the world. The Professional Services $12.8 $15.3 $22.7 Internet offersMILLION great potential for education and the educational experience. While our role as the platform is important, communities of $183.1 TOTAL REVENUES $111.4 $137.5 $183.1 OPERATING EXPENSES practice make the best solutions. Cost of Product Revenues $25.9 $29.6 $39.6 $183.1 TOTAL REVENUES ($ IN MILLIONS) Cost of Professional Services Revenues $8.0 $10.2 $16.0 $39.8 OPERATING EXPENSES Research & Development $13.7 $13.9 $27.2 Cost of Product Revenues $25.9 $29.6 $39.6 $32.7 Sales & Marketing $35.2 $37.9 $58.3 Cost of Professional Services Revenues $8.0 $10.2 $16.0 General & Administrative $39.8 $15.1 $19.3 $35.8 2006 TOTAL REVENUES Research & Development $13.7 $13.9 $27.2 Amortization of Intangibles Resulting from Acquisitions $3.5 $0.3 $18.0 2004 $111.4 $32.7 $137.5 Sales & Marketing $35.2 $37.9 $58.3 TOTAL OPERATING EXPENSES FINANCIAL$101.4 $111.2 HIGHLIGHTS$194.9 General & Administrative $15.1 $19.3 $35.8 INCOME (LOSS) FROM OPERATIONS $10.0 $24.4 ($11.8) Amortization of Intangibles Resulting from Acquisitions $3.5 $0.3 $18.0 NET INCOME (LOSS) $10.0 $41.9 ($10.7) YEAR ENDING DECEMBER 31, 0 2004 2005 2006 2004 2005 2006 TOTAL OPERATING EXPENSES $101.4 $111.2 $194.9 2006 TOTAL REVENUES $137.5 2005 $135.7 FY ENDING DEC. 31, 2004 2005 2006 NET CA2006SH NET PR CAOVIDEDSH PR OVBYIDED OPERA BY OPERTINGAT AINGCTIVITIES ACTIVITIES $32.7 $39.8 $22.9 ($ IN MILLIONS) $111.4 INCOME (LOSS) FROM OPERAREVENUESTIONS $10.0 $24.4 ($11.8) Products $98.6 $120.4 $160.4 REVENUES MILLION Professional Services $12.8 $15.3 $22.7 Products $ 98.6 $ 120.4 $ 160.4 $183MILLION.1 NET INCOME (LOSS) $10.0 $41.9 ($10.7) ($22.9) 0 2004 2005 MILLION2006 0 2004 2005 2006 2006 $183.1 NET CASH PROVIDED BY OPERATOTALTING REVENUES ACTIVITIES $32.7 $111$39.8.4 $137.5 $22.9 $183.1 Professional Services 12.8 15.3 22.7 2006 TOTAL REVENUES $183.1 NET CASH PROVIDED BY FY ENDING DEC. 31, 2004 2005 2006 2006 NET CASH PROVIDED BY OPERATING ACTIVITIES TOTAL REVENUES $111.4 $ 111.4 $ 135.7 $ 18TOT3.AL 1REVENUES ($ IN MILLIONS)
OPERATING EXPENSES OPERATING ACTIVITIES ($ IN MILLIONS) 0 Cost of Product Revenues $25.9 $29.6 $39.6 REVENUES Cost of Professional Services Revenues $8.0 $10.2 $16.0 $39.8 Products $98.6 $120.4 $160.4 Research & Development $13.7 $13.9 $27.2 ($22.9) $32.7 MILLIONOPERATING EXPENSES 0 2004 2005 2006 Professional Services Sales & Marketing $35.2 $37.9 $58.3 $12.8 $15.3 $22.7 MILLION General & Administrative $15.1 $19.3 $35.8 Cost of Product Revenues $ 25.9 $ 29.6 $ 39.6 TOTAL REVENUES $111.4 $137.5 $183.1 Amortization of Intangibles Resulting from Acquisitions $3.5 $0.3 $18.0 NET CASH PROVIDED BY Cost of Professional Services Revenues TOTAL REVENUES ($ IN MILLIONS) 8.0 10.2 16.0 $183.1 TOTAL REVENUES ($ IN MILLIONS) TOTAL OPERATING EXPENSES $101.4 $111.2 $194.9 OPERATING ACTIVITIES ($ IN MILLIONS) $137.5 Research and Development 13.7 13.9 27.2 OPERATING EXPENSES Cost of Product Revenues $25.9 $29.6 $39.6 INCOME (LOSS) FROM OPERATIONS $10.0 $24.4 ($11.8) Sales and Marketing 35.22006 TOTAL REVENUES37.9 58.3 NET INCOME (LOSS) $39.8 $10.0 $41.9 ($10.7) 2004 $111.4 Cost of Professional Services Revenues $8.0 $10.2 $16.0 0 2004 2005 2006 General and Administrative 15.1 19.3 35.8 Research & Development $13.7 $13.9 $27.2 NET CASH PROVIDED BY OPERATING ACTIVITIES $32.7 $39.8 $22.9 $32.7 Amortization of Intangibles Resulting from Acquisitions 3.5 0.3 18.0 NET CASH PROVIDED BY OPERATING ACTIVITIES ($ IN MILLIONS) Sales & Marketing $35.2 $37.9 $58.3 YEAR ENDING DECEMBER 31, 2004 2005 $111.4 2006 2005 $135.7 General & Administrative $15.1 $19.3 $35.8 ($ IN MILLIONS) TOTAL OPERATING EXPENSES $ 101.4 $ 111.2 $ 194.9 2006 NET CASH PROVIDED BY OPERATING ACTIVITIES TOTAL REVENUES ($ IN MILLIONS) Amortization of Intangibles Resulting from Acquisitions $3.5 $0.3 $18.0 REVENUES ($22.9) 0 2004 2005 2006 Products $ 98.6 $ 120.4 $ 160.4 $183MILLION.1 $137.5 2006 $183.1 TOTAL OPERATING EXPENSES $101.4 $111.2 $194.9 Professional Services INCOME (LOSS) FROM OPERA12.8TIONS 15.3 22.7 $ 10.0 $ 24.4 $ (11.8) 2004 $32.7 TOTAL REVENUES NET CASH PROVIDED BY $ 111.4 $ 135.TOT7 AL REVENUES$ 18 ($3. 1IN MILLIONS)
2006 TOTAL REVENUES 0 OPERATING ACTIVITIES ($ IN MILLIONS) INCOME (LOSS) FROM OPERATIONS $10.0 $24.4 ($11.8) NET INCOME (LOSS) 2004 $$11110.4.0 $ 41.9 $ (10.7) OPERATING EXPENSES NET INCOME (LOSS) $10.0 $41.9 ($10.7) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 32.7 $ 39.8 $ 22.9 0 2004 2005 2006 Cost of Product Revenues $ 25.9 $ 29.6 $ 39.6 2005 $39.8 NET CASH PROVIDED BY OPERATING ACTIVITIES $32.7 $39.8 $22.9 Cost of Professional Services Revenues 8.0 10.2 16.0 YEAR ENDING DECEMBER 31, 2004 2005 2006 Research and Development 13.7 13.9 27.2 2005 $135.7 ($ IN MILLIONS) Sales and$ Mark111eting.4 35.2 37.9 58.3 $22.9MILLION TOTAL REVENUES ($ IN MILLIONS) REVENUES General and Administrative 15.1 19.3 35.8 NET CASH PROVIDED BY OPERATING ACTIVITIES ($ IN MILLIONS) Products $ 98.6 $ 120.4 $ 160.4 Amortization of Intangibles Resulting from Acquisitions $13.5 830.3 18.0MILLION.1 2006 $22.9 ($22.9) 2004 2005 2006 2006 2006 NET CASH PROVIDED BY OPERATING ACTIVITIES$183.1 Professional Services 12.8 15.3 22.7 TOTAL0 OPERATING EXPENSES 2006 TOTAL REVENUES$ 101.4 $ 111.2 $ 194.9 2004 $111.4 TOTAL REVENUES $ 111.4 $ 135.7 $ 183.1 INCOME (LOSS) FROM OPERATIONS $ 10.0 $ 24.4 $ (11.8) 2004 $32.7 0 NET CASH PROVIDED BY 0 NET INCOMETOT (LALOSS) REVENUES ($ IN MILLIONS) $ 10.0 $ 41.9 $ (10.7) OPERATING ACTIVITIES ($ IN MILLIONS) YEAR ENDING DECEMBER 31, 2004 2005 2006 2005 $135.7 OPERATING EXPENSES NET CASH PROVIDED BY OPERATING ACTIVITIES $ 32.7 $ 39.8 $ 22.9 2005 $39.8 Cost of Product Revenues ($ IN MILLIONS) $ 25.9 $ 29.6 $ 39.6 REVENUES Cost of Professional Services RPrevoductsenues 8.0 $ 98.6 10$.2120.4 $ 16160.4.0 $183MILLION.1 $22.9MILLION 2006 $183.1 Research and Development Professional Services 13.7 12.8 13.9 15.3 2722.7.2 2006 $22.9 TOTAL REVENUES $ 111.4 $ 135.7 $ 183.1
Sales and Marketing 35.2 37.9 58.3 0
General and Administrative 15.1 19.3 35.8 0 Amortization of Intangibles OPERAResultingTING fr EXPENSESom Acquisitions 3.5 0.3 18.0 TOTAL REVENUES ($ IN MILLIONS) NET CASH PROVIDED BY OPERATING ACTIVITIES ($ IN MILLIONS) Cost of Product Revenues $ 25.9 $ 29.6 $ 39.6 TOTAL OPERATING EXPENSES Cost of Professional Services Revenues $ 101.4 8.0 $ 111.2 10.2 $ 194.916.0 2006 NET CASH PROVIDED BY OPERATING ACTIVITIES Research and Development 13.7 13.9 27.2 2006 TOTAL REVENUES Sales and Marketing 35.2 37.9 58.3 2004 $32.7 INCOME (LOSS) FROM OPERATIONS $ 10.0 $ 24.4 $ (11.8) 2004 $111.4 General and Administrative 15.1 19.3 35.8 NET INCOME (LOSS) Amortization of Intangibles Resulting from Acquisitions $ 10.0 3.5 $ 41.9 0.3 $ (10.7)18.0 NET CASH PROVIDED BY OPERATING ACTIVITIES ($ IN MILLIONS) NET CASH PROVIDED BY OPERATOTALTING OPER AATCTIVITIESING EXPENSES $ 32.7 $ 101.4 $ 39.8$ 111.2 $ $ 22.9194.9 2006 NET CASH PROVIDED BY OPERATING ACTIVITIES YEAR ENDING DECEMBER 31, 2004 2005 2006 2005 $135.7 2005 $39.8 INCOME (LOSS) FROM OPERATIONS $ 10.0 $ 24.4 $ (11.8) 2004 $32.7 ($ IN MILLIONS) NET INCOME (LOSS) $ 10.0 $ 41.9 $ (10.7) $22.9MILLION REVENUES NET CASH PROVIDED BY OPERATING ACTIVITIES $ 32.7 $ 39.8 $ 22.9 Products $ 98.6 $ 120.4 $ 160.4 $183MILLION.1 2006 $183.1 2005 $39.8 2006 $22.9 Professional Services 12.8 15.3 22.7 $22.9MILLION TOTAL REVENUES $ 111.4 $ 135.7 $ 183.1 0 0 2006 $22.9
OPERATING EXPENSES 0 Cost of Product Revenues $ 25.9 $ 29.6 $ 39.6 Cost of Professional Services Revenues 8.0 10.2 16.0 Research and Development 13.7 13.9 27.2 Sales and Marketing 35.2 37.9 58.3 78151_cvr.indd 3 4/30/07 12:56:11 PM General and Administrative 15.1 19.3 35.8 Amortization of Intangibles Resulting from Acquisitions 3.5 0.3 18.0 NET CASH PROVIDED BY OPERATING ACTIVITIES ($ IN MILLIONS) TOTAL OPERATING EXPENSES $ 101.4 $ 111.2 $ 194.9 2006 NET CASH PROVIDED BY OPERATING ACTIVITIES
INCOME (LOSS) FROM OPERATIONS $ 10.0 $ 24.4 $ (11.8) 2004 $32.7
NET INCOME (LOSS) $ 10.0 $ 41.9 $ (10.7) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 32.7 $ 39.8 $ 22.9 2005 $39.8
$22.9MILLION 2006 $22.9 0 To Our Fellow Shareholders We are pleased to once again offer a few words highlighting Building on Our Strengths our recent accomplishments, outlining our strategy for future growth and, of course, thank those responsible for driving our Blackboard has unique expertise and capabilities in the continuous success at Blackboard Inc. development of e-Education software products which will serve us well as we continue to broaden our offerings to address the 2006 Accomplishments growing challenges and complexities that academic institutions face. Blackboard was a pioneer in the e-Education industry in 2006 marked our ninth consecutive year of operational 1998 with the launch of the Blackboard Learning System™. success and strong financial growth as we once again focused We were quickly recognized as a leading course management on our long-term strategy of retaining, expanding and growing software vendor with this launch and expanded our offering our client relationships. The results of our clear focus are very with the industry’s first enterprise solution in 2000. Over the much reflected in our 2006 operational metrics: years, we have continued to lead the industry through ongoing innovation in our course management software products as • Our revenue increased 35 percent to $183.1 million well as new product development launches. • Our renewal rate exceeded our historical target of 90 percent. Today, we have two software suites to address the academic • Our client count was 3,462, a 53 percent increase over and commerce needs of academic institutions. Blackboard 2005. has built a core competency in continually delivering cutting- • Our enterprise license count was 3,492, a 67 percent edge software for the education industry and we will continue increase over 2005. to do so for years to come. In 2007, we intend to focus on • Our ASP hosting count was 455, a 31 percent increase meeting our clients’ growing needs and requirements through over 2005. continued innovation in product development and constantly • Our client up-sell rate from the basic version of the improving client service and support. Blackboard Learning System™ to the enterprise version exceeded our historical target of 10 percent. Towards this end, we are focused on a number of significant initiatives, including: Perhaps our most significant operational priority in 2006 was the successful merger and integration of WebCT, Inc. Our • Release of the Blackboard Content System™ and team worked incredibly hard in preparing for the transaction Blackboard Community System™ to our acquired clients and planning the various stages of integration and as a result from the WebCT merger. our two organizations came together quickly. As a result of this • Launch of the Blackboard Outcomes System™ to our client transaction, Blackboard is in excellent position for the many community. opportunities ahead. • Ongoing innovation and development across all products.
Consider that with our merger with WebCT, we have: In addition, we will continue to invest substantially in client support and service. Our goal is for 100 percent client • Added approximately 1,300 schools, colleges and satisfaction. We are committed to enhancing and improving the universities to our global community of practice. experience for our users, which investors know in turn, drives • Doubled our number of international clients and greatly ongoing sales as well as long-term client retention. enhanced our international reseller network. • Increased the quantity and quality of our professional staff We thank our senior management team and our incredible which will allow us to continue to lead the industry. staff for their commitment to Blackboard and the education industry. To our shareholders, we once again express our In short, with WebCT we have established a significant presence thanks for your continued commitment to Blackboard Inc. Our across U.S. and international academic institutions, which we successes in 2006 have positioned us well to deliver for the will continue to expand in 2007 and beyond. years ahead.
Matthew Pittinsky Michael Chasen Chairman of the Board Chief Executive Officer and President
778151_BB_Letter.indd8151_BB_Letter.indd 1 44/27/07/27/07 10:25:5810:25:58 AMAM UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the fiscal year ended December 31, 2006 Commission file number: 000-50784 Blackboard Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware 52-2081178 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1899 L Street, N.W. 20036 Washington D.C. (Zip Code) (Address of Principal Executive Offices) Registrant’s telephone number, including area code: (202) 463-4860 Securities registered pursuant to Section 12(g) of the Act: None Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value per share Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¥ No n Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes n No ¥ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¥ No n Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¥ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, or a non- accelerated filer. Large accelerated filer ¥ Accelerated filer n Non-accelerated filer n Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes n No ¥ The aggregate market value of outstanding voting stock held by non-affiliates of the registrant as of June 30, 2006 was approximately $751.6 million based on the last reported sale price of the registrant’s common stock on The NASDAQ Global Market as of the close of business on that day. There were 28,282,274 shares of the registrant’s common stock outstanding as of January 31, 2007. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement for its 2007 annual meeting of stockholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year end of December 31, 2006, are incorporated by reference into Part III of this Form 10-K. BLACKBOARD INC. Form 10-K TABLE OF CONTENTS
Page Number PART I Item 1. Business 1 Item 1A. Risk Factors 10 Item 1B. Unresolved Staff Comments 19 Item 2. Properties 19 Item 3. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 19 PART II Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities 20 Item 6. Selected Financial Data 22 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 42 Item 8. Financial Statements and Supplementary Data 43 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 69 Item 9A. Controls and Procedures 69 Item 9B. Other Information 72 PART III Item 10. Directors and Executive Officers of the Registrant 72 Item 11. Executive Compensation 72 Item 12. Security Ownership of Certain Beneficial Owners and Management 72 Item 13. Certain Relationships and Related Transactions 72 Item 14. Principal Accounting Fees and Services 72 PART IV Item 15. Exhibits, Financial Statement Schedules 73
ii This report contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by such statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” under Item 1A. When used in this report, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are generally intended to identify forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this report. Blackboard assumes no obligation and does not intend to update these forward-looking statements.
PART I
Item 1. Business. General We are a leading provider of enterprise software applications and related services to the education industry. Our product line consists of various software applications delivered in two suites, the Blackboard Academic SuiteTM and the Blackboard Commerce SuiteTM. We license these products on a renewable basis, typically for an annual term. Our clients primarily include colleges, universities, schools and other education providers, as well as textbook publishers and student-focused merchants who serve these education providers and their students. These clients use our software to integrate technology into the education experience and campus life, and to support activities such as a professor assigning digital materials on a class website; a student collaborating with peers or completing research online; an administrator managing a departmental website; or a merchant conducting cash-free transactions with students and faculty through pre-funded debit accounts. We believe that our operating history provides us with experience that enables us to analyze and address the needs of the education industry. We began operations in 1997 as a limited liability company organized under the laws of the state of Delaware and served as a primary contractor to an education industry technical standards organization. In 1998, we incorporated under the laws of the state of Delaware and acquired CourseInfo LLC, which had developed an internal online learning system used by faculty at Cornell University, and had begun marketing its technology to universities and school districts in the United States and Canada. Since the time of our acquisition of CourseInfo, we have grown from approximately 26 licenses of one software application as of December 31, 1998 to more than 4,700 licenses of our software applications as of December 31, 2006. Our software applications can be installed locally at a client site or hosted centrally in our data centers. As of December 31, 2006, approximately 87% of our installations were installed locally and approximately 13% were hosted by us. As of December 31, 2006, we had over 3,400 clients in approximately 70 countries holding more than 4,700 licenses of our software. We count a university or school district as a single client even if it includes multiple entities that are separately licensing our products. We count each license for any one of our software applications as a separate license. As a result, it is possible for a single client to have multiple licenses. On February 28, 2006, we completed the acquisition of WebCT, Inc. for a purchase price of $178.3 mil- lion in cash pursuant to the agreement and plan of merger with WebCT. In connection with the transaction, we paid a portion of the purchase price using borrowings under a $70.0 million senior secured credit facilities agreement with Credit Suisse, Cayman Islands Branch (Credit Suisse) under which $24.4 million remained outstanding as of December 31, 2006.
Customer Overview Our customer base consists primarily of U.S. postsecondary education clients, which accounted for approximately 62% of our total revenues for 2006. We also sell to international postsecondary clients, U.S. K-12 education clients and others, including primarily education publishers, commercial education
1 providers and United States government organizations, which accounted for approximately 19%, 8% and 11% of our total revenues for 2006, respectively.
Products and Services We have created a broad product line of enterprise software applications for the education industry. Clients can license our enterprise software applications individually or in one of two suites, the Blackboard Academic Suite and the Blackboard Commerce Suite. We offer the Blackboard Academic Suite in all of our markets, and currently offer the Blackboard Commerce Suite primarily to U.S. and Canadian postsecondary customers. We also sometimes serve as an application service provider, offering hosting for our clients that prefer to outsource the management of the hardware, bandwidth and servers necessary to run our applications. In addition to our products, we offer a variety of professional services that help clients maximize the benefit received from our products, including project management, custom application development and training.
The Blackboard Academic Suite The Blackboard Academic Suite provides a scalable and easy-to-use technology platform for delivering education online, managing digital content and aggregating access to tools, information and content through an integrated Web portal environment. The Blackboard Academic Suite includes the products formerly known as WebCT Campus EditionTM and WebCT VistaTM, which were acquired in our merger with WebCT, Inc. The applications that make up the Blackboard Academic Suite are: • the Blackboard Learning SystemTM basic products, which include Blackboard Learning System — Basic License and Blackboard Learning System — CE Basic License (formerly WebCT Campus EditionTM — Focus license), • the Blackboard Learning System enterprise products, which include Blackboard Learning System — Enterprise License, Blackboard Learning System — CE Enterprise License (formerly WebCT Campus Edition) and Blackboard Learning System — Vista Enterprise License (formerly WebCT Vista), • the Blackboard Community SystemTM ; • the Blackboard Content SystemTM ; • the Blackboard Portfolio SystemTM; and • the Blackboard Outcomes SystemTM .
Blackboard Learning System The Blackboard Learning System allows education providers to support a feature-rich online teaching and learning environment that can be used to augment a classroom-based program or for distance learning. The major capabilities of the Blackboard Learning System include: • Learning environment. Instructors can post syllabi and course materials, including documents, graph- ics, audio, video and multimedia; manage course communication through integrated email, discussion forums and live virtual classrooms; facilitate group collaboration, communication and file-sharing; create, deliver and automatically score online assignments and tests; and report grades and other information to students. Additional capabilities are available through the integration of third-party Blackboard Building Blocks» tools developed by our clients or independent parties. Blackboard Building Blocks allow institutions to download, install and manage third-party extensions. These third- party applications add functionality to our products and several client-managed online communities exist to foster open source development of enhancements to our products as well. • Integration with existing systems. Built on an enterprise Java architecture, the Blackboard Learning System is capable of supporting multiple end users in a high-usage environment. Our products can be integrated with existing campus student information systems and campus registrar’s systems to access the user, course and enrollment information stored throughout the institution.
2 • System administration. User categories, or roles, are definable across the features of our products, including the ability to designate access parameters for all roles and set access policies for guest accounts and observers, such as parents, advisors, mentors and supervisors. System administrators can customize user roles. The appearance and configuration of our products are customizable by each client for multiple independent user populations on the same system hardware and database.
In addition, we offer the Blackboard Learning System basic products stand-alone, entry-level versions of the Blackboard Learning System suitable for small-scale implementations. The Blackboard Learning System enterprise products support various language configurations, including English, Spanish, Italian, Dutch, German, French, Japanese, Arabic and Chinese.
Blackboard Community System
The Blackboard Community System is an enterprise information portal application designed specifically for the education industry and is currently available to customers with the Blackboard Learning System — Enterprise license. As part of the Blackboard Academic Suite, the Blackboard Community System extends the Blackboard Learning System to include functionality for student organizations, faculty and staff, departmental collaboration, information distribution and single sign-on access to existing administrative systems. The major academic capabilities of the Blackboard Community System include:
• Configurable portal environment enabling one stop access to services. The Blackboard Community System enables institutions to provide their users, such as students, faculty and administrators, access through a customizable Web portal to multiple content sources, campus services, administrative systems and personal information management tools, such as email and calendar. The Blackboard Community System can act as the single sign-on access to a variety of campus systems, eliminating the need for multiple access points and identification verifications. Institutions and independent software vendors can create custom portal applications that provide views into content and data from other systems or integrate other applications.
• Facilitating academic and co-curricular collaboration using community and communication tools. The Blackboard Community System facilitates the creation of meaningful campus connections by allowing institutions to define dedicated online environments for departments, clubs and other groups. Members of organizations can manage their own operations, as well as upload and share documents, and use their own communication tools.
• Maintaining distinct campus identities. An institution can configure the Blackboard Community System to support multiple identities or brands within the institution (such as multiple campuses, a law school, medical school or continuing education program) and deliver content to targeted, institution- defined roles. In addition, users can customize the Blackboard Community System interface according to their needs and preferences.
Blackboard Content System
The Blackboard Content System provides enterprise content management capabilities and is currently available to customers with the Blackboard Learning System — Enterprise license. The application supports teaching, learning, research, archival, extracurricular and departmental activities that require the central management, tagging, sharing and re-use of electronic files, such as lecture notes for multiple sections of a course, learning objects, test banks and library electronic reserve materials. The major capabilities of the Blackboard Content System include:
• Storing and accessing learning materials. Institutions can make secure, web-based, drag-and-drop file storage space available to all users, who can then use a configurable permissions structure to share files with individuals or groups, track versions, and add comments. To assure appropriate usage of the file space, administrators can manage disk space quotas and set bandwidth controls.
3 • Learning content management. Instructors can manage versions of documents and other course material and can re-use content across courses. Institutions can create moderated content repositories at departmental, school and institutional levels to facilitate the sharing and searching of digital content. • Integrating library resources into the learning environment. Librarians can create and manage collections of digital assets for use by specific courses, disciplines or the entire institution. • Collecting and sharing materials within electronic portfolios. Users can collect and organize their academic work as electronic portfolios, which can be shared with other users on the system, as well as published externally. These portfolios can be used for personal reflection, academic assignments, program completion, and educational standards alignment, or for professional development, such as résumés and job applications.
Blackboard Portfolio System The Blackboard Portfolio System is a personal portfolio application that enables users to collect and organize their academic work and is currently available to customers with the Blackboard Learning System — CE and Vista Enterprise licenses. These portfolios can be shared with other users on the system, as well as published externally. Portfolios tie to the course environment, enhancing ease of use for students and faculty as well as facilitating system set up and maintenance. The Blackboard Portfolio System was released in April 2006. The major capabilities of the Blackboard Portfolio System include: • Collecting learning materials. Users can incorporate specific examples of student’s learning, from their courses into their portfolios. Easy collection of student work is also facilitated by the ability to upload diverse documents, multimedia or presentations into the portfolio. Users can also use an HTML editor to create materials directly in their portfolios. • Presenting materials. Flexible layouts help users to personalize their portfolios with fonts, back- grounds, and navigation menus of their choice. Faculty can use templates to provide guidance and direction to students and other authors as well as to create consistent presentation formats. There can be multiple template formats, for showcasing research work or resumes, or for reflecting on coursework, for example. Shared portfolios allow learning groups and project teams to develop portfolios together, encouraging collaboration and social learning. • Reflecting on learning content: Personal reflection capabilities allow users to create blogs and journals within their portfolio, facilitating reflection on their learning. Discussion boards embedded within portfolios enable users to obtain feedback from students, advisors and instructors.
Blackboard Outcomes System The Blackboard Outcomes SystemTM was released in December 2006 and is currently available to customers with the Blackboard Learning System — Enterprise license. Supported by a set of strategic and technical services, this application supports and coordinates the academic and administrative assessment processes taking place across an institution’s many departments. This application enables the planning and measuring of student, teaching and institutional outcomes and provides a comprehensive set of instruments for student and program assessment. The Blackboard Outcomes System delivers a flexible solution to meet the unique requirements of education. It addresses the common challenges faced by institutions seeking to measure student outcomes such as increasing adoption of assessment tools, improving the efficacy of assessment activities and enhancing student engagement in the learning process. Major capabilities include: • Planning outcomes. The “Standards, Goals and Student Learning Objectives” feature enables institu- tions to document intended outcomes of courses, programs, departments, colleges, universities and standards bodies. Rubrics, or standard evaluation criteria, facilitate shared and consistent evaluation of outcomes, while curriculum maps highlight the connection between program goals and courses and co- curricular educational experiences.
4 • Measuring learning and administrative outcomes. Various assessment tools simplify the collection of student work and its evaluation against shared rubrics. Surveys and course evaluations enable users to collect useful indirect assessment data, soliciting attitudes and opinions from constituents on-campus and off-campus.
• Improving learning and institutional effectiveness. Operational and analytic reports provide insight into assessment plans, activities, data, follow-up actions and correlations to all levels of an institution.
The Blackboard Commerce Suite
The Blackboard Commerce Suite can be used for on- and off-campus commerce, online e-commerce, meal plan administration, vending, laundry services, copy and print management and student and staff identification. The applications that make up the Blackboard Commerce Suite are:
• the Blackboard Transaction SystemTM;
• the Blackboard Community System; and
• Blackboard OneTM.
Blackboard Transaction System
The Blackboard Transaction System is an enterprise software application that we license along with various hardware to allow clients to establish an integrated student debit account program for charging incidental expenses such as meals and academic materials, typically using the campus ID card. The hardware that we sell as part of the Blackboard Transaction System includes servers, cards, card readers and point-of-sale devices. The Blackboard Transaction System can also support activities such as facilities access and identity verification. The principal features of the Blackboard Transaction System include:
• Commerce. Transaction processing capabilities of the Blackboard Transaction System support the creation and management of student debit accounts, as well as the processing of payments against those accounts using student ID cards on campus, such as in dining facilities, vending machines, copy machines and bookstores, off-campus and online. Our clients use the Blackboard Transaction System to manage point-of-sale transactions, such as prepaid debit cards, meal plan administration, cash equivalency, privilege verification and discounts, and self-service or unattended transactions, such as vending, laundry, printing and copying and parking.
• Activities management and security. The access-rights capabilities of the Blackboard Transaction System enable a variety of applications using the client’s investment in a single-card environment for commerce. These include event admission, student government voting, wireless verification on buses, library authorization and computer lab access and tracking. In addition, the system interfaces directly with door access points to manage identification and secure access control to facilities using the same student ID card.
Blackboard Community System
In addition to the functionalities it provides as part of the Blackboard Academic Suite, the Blackboard Community System enables additional transaction capabilities when licensed as part of the Blackboard Commerce Suite, including:
• eMarketplace. The Blackboard Community System enables campus business units and student organi- zations to sell products, which may be paid with the student debit account. Users can activate template- driven tools that allow them to describe, price, display and charge for an item all within the campus portal environment. Uses include campus bookstore online purchases, athletics and event tickets, library fees and parking fees.
5 • Web account management. Through an online account, end users can manage a variety of activities, including online deposits, guest and parent deposits, balance inquiries, transaction history statements and lost and stolen card reports.
Blackboard One Blackboard One is bundled with the Blackboard Commerce Suite and enables students and faculty to use their university ID cards as a form of payment off-campus. We recruit local merchants to accept student debit accounts as a form of payment and facilitate the processing of transactions by third-party merchants that use the Blackboard Transaction System. By utilizing the existing Blackboard Transaction System debit account at the university, Blackboard One provides students with a secure, cashless and convenient way to make purchases while assuring parents that their funds will be spent within a university-approved merchant network. We develop the off-campus merchant network on behalf of each university and manage the program, from merchant acquisition and funds settlement to transaction terminal support. Also, if requested by the client, we simultaneously conduct customized marketing campaigns designed to build the card program brand and increase deposits into the accounts.
Professional Services Our professional services support the implementation and maintenance of the educational environment in order to help clients maximize the value of our various enterprise software applications. Our services group offers: • project management; • integration of our applications with existing campus systems; • user interface customization; • installation and configuration; • course and content migration; and • custom Blackboard Building Blocks application development. Training is available online and on-site for both the Blackboard Academic Suite and the Blackboard Commerce Suite, as is instructional design consulting for the Blackboard Academic Suite.
Competition The market for education enterprise software is highly fragmented and rapidly evolving, and we expect competition in this market to persist and intensify. Our primary competitors for the Blackboard Academic Suite are companies and open source solutions that provide course management systems, such as ANGEL Learning, Inc., Desire2Learn Inc., eCollege.com, Moodle, Jenzabar, Inc., The Sakai Project, VCampus Educator, and WebTycho; learning content management systems, such as HarvestRoad Ltd. and Concord USA, Inc.; and education enterprise information portal technologies, such as SunGard SCT Inc., an operating unit of SunGard Data Systems Inc. We also face competition from clients and potential clients who develop their own applications internally, large diversified software vendors who offer products in numerous markets including the education market and other open source software applications. Our competitors for the Blackboard Commerce Suite include companies that provide transaction systems, security systems and off-campus merchant relationship programs. We may also face competition from potential competitors that are substantially larger than we are and have significantly greater financial, technical and marketing resources, and established, extensive direct and indirect channels of distribution. As a result, they may be able to respond more quickly to new or emerging technologies and changes in client requirements, or to devote greater resources to the development, promotion and sale of their products than we can. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or prospective clients. Accordingly, it is possible that
6 new competitors or alliances among competitors may emerge and rapidly acquire significant market share to our detriment. We believe that the primary competitive factors in our markets are: • base of reference clients; • functional breadth and depth of solution offered; • ease of use; • complexity of installation and upgrade; • scalability of solution to meet growing needs; • client service; • availability of third-party application and content add-ons; • total cost of ownership; • financial stability; and • company reputation. We believe that we compete favorably on the basis of these factors.
Our Growth Strategy We seek to capitalize on our position as a leader in our market to grow our business by supporting several significant aspects of education, including teaching, learning, commerce and campus life. Key elements of our growth strategy include: • Growing annual license revenues. We intend to increase annual license revenues with existing clients through upgrades to current products, cross-selling of complementary applications and increased total license value commensurate with the value of our offerings. • Increasing penetration with U.S. postsecondary clients. We intend to capitalize on our experience in the U.S. postsecondary education market to further enhance our leadership position. • Offering new products to our target markets. Using feedback gathered from our clients and our sales and technical support groups, we intend to continue to develop and offer new upgrades, applications and application suites to increase our presence on campuses and expand the value provided to our clients. • Increasing sales to international postsecondary and U.S. K-12 clients. We intend to continue to expand sales and marketing efforts to increase sales of our applications to international postsecondary institutions as well as U.S. K-12 schools. • Pursuing strategic relationships and acquisition opportunities. We intend to continue to pursue strategic relationships with, acquisitions of, and investments in, companies that enhance the technolog- ical features of our products, offer complementary products, services and technologies, or broaden the scope of our product offerings into other areas.
Research and Development Each of the individual applications in our two product suites is developed and maintained by a dedicated team of software engineers, product managers and documentation specialists. In addition, we maintain three cross-product groups: an engineering services team, which focuses on highly technical product support issues that have been escalated by our telephone support operation; a quality control team, which tests our applications to identify and correct software errors and usability issues before a new product or update is released; and a research and development engineering team which works on special development projects that
7 involve third parties, including software tools for integrating our products with other campus systems. Our research and development group receives feedback on product improvement suggestions and new products from clients, either directly or through our sales and client support organizations. We periodically release maintenance updates to and new versions of our existing products. In addition, our research and development group works on new product initiatives as appropriate. Our products are primarily developed internally and, in support of the development of our products, we have acquired or licensed specialized products and technologies from other software firms. Our research and development expenses were $13.7 million, $13.9 mil- lion and $27.2 million in the years ended December 31, 2004, 2005 and 2006, respectively.
Marketing and Sales Marketing We engage in a variety of traditional and online marketing activities designed to provide sales lead generation, sales support and increasing market awareness. Our specific marketing activities include print advertising in trade publications, direct mail campaigns, speaking engagements and industry trade-shows and seminars, which help create awareness of our brand and products and services. Examples of specific marketing events include the Blackboard Summit, which is our annual meeting of educational and technology leaders from the United States and abroad; the Blackboard Users’ Conference, which is our annual conference dedicated to all users of Blackboard products as well as prospective clients; and Blackboard Days, which provide information sessions at current client sites for current and prospective clients. Our marketing group also manages our website, which serves as a source of information about us and our products.
Sales We sell our products through a direct sales force and, in some emerging international markets, through re-sellers. Regional sales managers are responsible for sales of our products in their territories and supervise account managers who are responsible for maintaining software and service renewal rates among our clients. Account managers are typically compensated in part based upon their achievement of renewal rate quotas, and pursue a variety of client relations activities aimed at maintaining and improving renewal rates. In addition, our sales organization includes technical sales engineers, who are experts in the technical aspects of our products and client implementations. In our experience, colleges, universities and schools frequently rely on references from peer institutions when selecting a vendor and often involve a variety of internal constituencies, such as instructors and students, when evaluating a product. In addition, most public education institutions and many private institutions utilize request for proposal, or RFP, processes, by which they announce their interest in purchasing an application and detail their requirements so that vendors may bid accordingly. As a result, we generate sales leads from sources such as interacting with attendees at conferences, visiting potential clients’ sites to provide briefings on the industry and our products, responding to inbound calls based on client recommendations and monitoring and responding to RFPs. We often structure our licenses in a manner that anticipates expansion from one product in a suite to multiple products in a suite, and we engage in state or regional agreements when appropriate to provide umbrella pricing and contractual terms for a group of institutions. We have U.S. sales offices in Washington, D.C. and Phoenix, Arizona. We have international sales offices in Amsterdam, Sydney and Tokyo.
8 Executive Officers
The following table lists our executive officers and their ages as of January 31, 2007.
Name Age Position Michael L. Chasen ...... 35 Chief executive officer, president, director Matthew L. Pittinsky ...... 34 Chairman, director Michael J. Beach ...... 36 Chief financial officer and treasurer Matthew H. Small ...... 34 Chief legal officer and secretary Peter Segall...... 45 President, North American higher education and operations David Sample ...... 58 Senior vice president for sales Jonathan R. Walsh ...... 34 Vicepresident for finance and accounting
Matthew Pittinsky has served as chairman of the board of directors since our founding in 1997. From June 1997 to November 1998, Mr. Pittinsky also served as chief executive officer. Before co-founding Blackboard, from July 1995 to June 1997 Mr. Pittinsky was a consultant with KPMG Consulting (now BearingPoint, Inc.) serving colleges and universities. Mr. Pittinsky is the editor of The Wired Tower, a book published in June 2002 analyzing the Internet’s impact on higher education. Mr. Pittinsky serves on the board of trustees of American University. Mr. Pittinsky received a BS degree from American University and an Ed.M degree from Harvard University Graduate School of Education. He is currently a Ph.D candidate at Columbia University Teachers College.
Michael Chasen has served as chief executive officer since January 2001, as president since February 2004 and as a director since our founding in 1997. From June 1997 to January 2001, Mr. Chasen served as president. Before co-founding Blackboard, from May 1996 to June 1997, Mr. Chasen was a consultant with KPMG Consulting (now BearingPoint, Inc.) serving colleges and universities. Mr. Chasen received a BS degree from American University and a MBA degree from Georgetown University School of Business.
Michael Beach has served as chief financial officer since September 2006 and treasurer since February 2004. From June 2001 to September 2006, Mr. Beach served as vice president for finance. Prior to joining us, from February 1997 to June 2001, Mr. Beach was an audit senior manager at the public accounting firm of Ernst & Young LLP. Mr. Beach received a BBA degree from James Madison University.
Matthew Small has served as chief legal officer since January 2006 and secretary since February 2004. Mr. Small served as senior vice president for legal and general counsel from January 2004 to January 2006, corporate counsel from September 2002 to January 2004 and assistant secretary from November 2002 to February 2004. Prior to joining us, from September 1999 to September 2002, Mr. Small was an associate at the law firm of Testa, Hurwitz & Thibeault LLP. Mr. Small received a BA degree from the University of Denver, a MBA degree from the University of Connecticut School of Business and a JD degree from the University of Connecticut Law School.
Peter Segall has served as president of North American higher education and operations since September 2006. From March 2006 to September 2006, Mr. Segall served as senior vice president of education strategy. Mr. Segall joined us through the merger with WebCT, Inc. where he was executive vice president and director from August 1999 until the completion of the merger with us in February 2006. Mr. Segall received a B.A. degree from Brown University and a masters of math and science education from the Harvard Graduate School of Education.
David Sample has served as senior vice president of sales since July 2005. Prior to joining us, from September 2002 to November 2003, Mr. Sample served as executive vice president for global sales at Princeton Softech, from November 2000 to September 2001, as president and CEO at Davox Corporation, from September 1998 to November 2000, as president and chief operating officer at ABT Corporation and, from July 1986 to March 1997, as senior vice president for sales at Hyperion Solutions Corporation. Mr. Sample received a BA degree from Trinity College.
9 Jonathan Walsh has served as vice president for finance and accounting since September 2006. From July 2001 to August 2006, he served as controller. Prior to joining us, from July 1998 to June 2001, Mr. Walsh held financial reporting and financial planning positions at Sunrise Assisted Living, Inc., AppNet, Inc. and CommerceOne, Inc. and from January 1995 to July 1998 Mr. Walsh was an audit senior at the public accounting firm of Ernst & Young LLP. Mr. Walsh received a BBA degree from James Madison University.
Employees As of December 31, 2006, we had 765 employees, including approximately 156 in sales; 61 in marketing and business development; 146 in support, ASP hosting and production; 146 in research and development; 136 in professional services; and 120 in general administration. None of our employees are represented by a labor union. We have never experienced a work stoppage and believe our relationship with our employees is good.
International Operations We currently operate predominately in the United States. Our revenues derived from operations in foreign countries for fiscal years 2004, 2005 and 2006 were $16.8 million, $21.9 million and $34.7 million, respectively. Substantially all of our material identifiable assets are located in the United States.
Website Access to U.S. Securities and Exchange Commission Reports Our Internet address is http://www.blackboard.com. Through our website, we make available, free of charge, access to all reports filed with the U.S. Securities and Exchange Commission including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to these reports, as filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Copies of any materials we file with, or furnish to, the SEC can also be obtained free of charge through the SEC’s website at http://www.sec.gov or at the SEC’s Public Reference Room at 450 Fifth St., N.W., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Item 1A. Risk Factors. Our merger with WebCT presents many risks, and we may not realize the financial and strategic goals that were contemplated at the time of the transaction. The WebCT merger, which was completed on February 28, 2006, is the largest acquisition that we have undertaken. We entered into this transaction with the expectation that it would result in various benefits including, among other things, enhanced revenue and profits, and enhancements to our product portfolio and customer base. Risks that we may encounter in seeking to realize these benefits include: • we may not realize the anticipated increase in our revenues if a larger than predicted number of customers decline to renew their contracts, if we are unable to sell WebCT’s products to our customer base or if the acquired contracts do not allow us to recognize revenues on a timely basis; • we may have difficulty incorporating WebCT’s technologies or products with our existing product lines and maintaining uniform standards, controls, procedures and policies; • we may have higher than anticipated costs in continuing support and development of WebCT’s products; • we may lose anticipated tax benefits or have additional legal or tax exposures; • we may not be able to retain key WebCT employees; • we may face contingencies related to product liability, intellectual property, financial disclosures, and accounting practices or internal controls; and
10 • we may be unable to manage effectively the increased size and complexity of the combined company, and our management’s attention may be diverted from our ongoing business by transition or integration issues.
Our business strategy contemplates future business combinations and acquisitions which may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention. During the course of our history, we have acquired several businesses, and a key element of our growth strategy is to pursue additional acquisitions in the future. Any acquisition could be expensive, disrupt our ongoing business and distract our management and employees. We may not be able to identify suitable acquisition candidates, and if we do identify suitable candidates, we may not be able to make these acquisitions on acceptable terms or at all. If we make an acquisition, we could have difficulty integrating the acquired technology, employees or operations. In addition, the key personnel of the acquired company may decide not to work for us. Acquisitions also involve the risk of potential unknown liabilities associated with the acquired business. As a result of these risks, we may not be able to achieve the expected benefits of any acquisition. If we are unsuccessful in completing or integrating acquisitions that we may pursue in the future, we would be required to reevaluate our growth strategy, and we may have incurred substantial expenses and devoted significant management time and resources in seeking to complete and integrate the acquisitions. Future business combinations could involve the acquisition of significant tangible and intangible assets, which could require us to record in our statements of operations ongoing amortization of intangible assets acquired in connection with acquisitions, which we currently do with respect to our historic acquisitions including the WebCT merger. In addition, we may need to record write-downs from future impairments of identified tangible and intangible assets and goodwill. These accounting charges would reduce any future reported earnings, or increase a reported loss. In future acquisitions, we could also incur debt to pay for acquisitions, or issue additional equity securities as consideration, which could cause our stockholders to suffer significant dilution. Our ability to utilize, if any, net operating loss carryforwards acquired in any acquisitions including those acquired in the WebCT merger, may be significantly limited or unusable by us under Section 382 or other sections of the Internal Revenue Code.
We incurred a significant amount of debt to finance the WebCT merger, which could constrict our liquid- ity, result in substantial cash outflows, and adversely affect our financial health and ability to obtain financing in the future. In connection with the WebCT merger, we secured $70.0 million in borrowings through Credit Suisse, Cayman Islands Branch consisting of a $60.0 million senior secured term loan facility repayable over six years and a $10.0 million senior secured revolving credit facility due and payable in full at the end of five years. As of December 31, 2006, $24.4 million was outstanding under the term loan facility, and no amount was outstanding under the revolving credit facility. This debt may impair our ability to obtain future additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes, and a substantial portion of our cash flows from operations may be dedicated to the debt repayment, thereby reducing the funds available to us for other purposes. This debt could make us more vulnerable to industry downturns and competitive pressures. Any failure by us to satisfy our obligations with respect to these debt obligations would constitute a default under the credit facilities.
Providing enterprise software applications to the education industry is an emerging and uncertain busi- ness; if the market for our products fails to develop, we will not be able to grow our business. Our success will depend on our ability to generate revenues by providing enterprise software applications and services to colleges, universities, schools and other education providers. This market has only recently developed, and the viability and profitability of this market is unproven. Our ability to grow our business will be compromised if we do not develop and market products and services that achieve broad market acceptance
11 with our current and potential clients and their students and employees. The use of online education, transactional or content management software applications and services in the education industry may not become widespread, and our products and services may not achieve commercial success. Even if potential clients decide to implement products of this type, they may still choose to design, develop or manage all or a part of their system internally. Given our clients’ relatively early adoption of enterprise software applications aimed at the education industry, they are likely to be less risk-averse than most colleges, universities, schools and other education providers. Accordingly, the rate at which we have been able to establish relationships with our clients in the past may not be indicative of the rate at which we will be able to establish additional client relationships in the future.
Most of our clients use our products to facilitate online education, which is a relatively new field; if online education does not continue to develop and gain acceptance, demand for our products could suffer. Our success will depend in part upon the continued adoption by our clients and potential clients of online education initiatives. Some academics and educators are opposed to online education in principle and have expressed concerns regarding the perceived loss of control over the education process that can result from offering courses online. Some of these critics, particularly college and university professors, have the capacity to influence the market for online education, and their opposition could reduce the demand for our products and services. In addition, the growth and development of the market for online education may prompt some members of the academic community to advocate more stringent protection of intellectual property associated with course content, which may impose additional burdens on clients and potential clients offering online education. This could require us to modify our products, or could cause these clients and potential clients to abandon their online education initiatives.
We face intense and growing competition, which could result in price reductions, reduced operating mar- gins and loss of market share. We operate in highly competitive markets and generally encounter intense competition to win contracts. If we are unable to successfully compete for new business and license renewals, our revenue growth and operating margins may decline. The markets for online education, transactional, portal and content manage- ment products are intensely competitive and rapidly changing, and barriers to entry in these markets are relatively low. With the introduction of new technologies and market entrants, we expect competition to intensify in the future. Some of our principal competitors offer their products at a lower price, which has resulted in pricing pressures. Such pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our product and service offerings to achieve or maintain more widespread market acceptance. Our primary competitors for the Blackboard Academic Suite are companies and open source solutions that provide course management systems, such as ANGEL Learning, Inc., Desire2Learn Inc., eCollege.com, Jenzabar, Inc., Moodle, The Sakai Project, VCampus Educator and WebTycho; learning content management systems, such as HarvestRoad Ltd. and Concord USA, Inc.; and education enterprise information portal technologies, such as SunGard SCT Inc., an operating unit of SunGard Data Systems Inc. We also face competition from clients and potential clients who develop their own applications internally, large diversified software vendors who offer products in numerous markets including the education market and other open source software applications. Our competitors for the Blackboard Commerce Suite include companies that provide transaction systems, security systems, and off-campus merchant relationship programs. We may also face competition from potential competitors that are substantially larger than we are and have significantly greater financial, technical and marketing resources, and established, extensive direct and indirect channels of distribution. As a result, they may be able to respond more quickly to new or emerging technologies and changes in client requirements, or to devote greater resources to the development, promotion and sale of their products than we can. In addition, current and potential competitors have established or may
12 establish cooperative relationships among themselves or prospective clients. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share to our detriment.
If potential clients or competitors use open source software to develop products that are competitive with our products and services, we may face decreased demand and pressure to reduce the prices for our products. The growing acceptance and prevalence of open source software may make it easier for competitors or potential competitors to develop software applications that compete with our products, or for clients and potential clients to internally develop software applications that they would otherwise have licensed from us. One of the aspects of open source software is that it can be modified or used to develop new software that competes with proprietary software applications, such as ours. Such competition can develop without the degree of overhead and lead time required by traditional proprietary software companies. As open source offerings become more prevalent, customers may defer or forego purchases of our products, which could reduce our sales and lengthen the sales cycle for our products or result in the loss of current clients to open source solutions. If we are unable to differentiate our products from competitive products based on open source software, demand for our products and services may decline, and we may face pressure to reduce the prices of our products.
Because most of our licenses are renewable on an annual basis, a reduction in our license renewal rate could significantly reduce our revenues. Our clients have no obligation to renew their licenses for our products after the expiration of the initial license period, which is typically one year, and some clients have elected not to do so. A decline in license renewal rates could cause our revenues to decline. We have limited historical data with respect to rates of renewals, so we cannot accurately predict future renewal rates. Our license renewal rates may decline or fluctuate as a result of a number of factors, including client dissatisfaction with our products and services, our failure to update our products to maintain their attractiveness in the market or budgetary constraints or changes in budget priorities faced by our clients. We may experience difficulties that could delay or prevent the successful development, introduction and sale of new products under development. If introduced for sale, the new products may not adequately meet the requirements of the marketplace and may not achieve any significant degree of market acceptance, which could cause our financial results to suffer. In addition, during the development period for the new products, our customers may defer or forego purchases of our products and services.
If our newest product, the Blackboard Outcomes System, does not gain widespread market acceptance, our financial results could suffer. We introduced our newest software application, the Blackboard Outcomes System in December 2006. Our ability to grow our business will depend, in part, on client acceptance of this product, which is currently unproven. If we are not successful in gaining market acceptance of this product, our revenues may fall below our expectations.
Because we generally recognize revenues ratably over the term of our contract with a client, downturns or upturns in sales will not be fully reflected in our operating results until future periods. We recognize most of our revenues from clients monthly over the terms of their agreements, which are typically 12 months, although terms can range from one month to over 60 months. As a result, much of the revenue we report in each quarter is attributable to agreements entered into during previous quarters. Consequently, a decline in sales, client renewals, or market acceptance of our products in any one quarter will not necessarily be fully reflected in the revenues in that quarter, and will negatively affect our revenues and profitability in future quarters. This ratable revenue recognition also makes it difficult for us to rapidly
13 increase our revenues through additional sales in any period, as revenues from new clients must be recognized over the applicable agreement term.
Our operating margins may suffer if our professional services revenues increase in proportion to total revenues because our professional services revenues have lower gross margins. Because our professional services revenues typically have lower gross margins than our product revenues, an increase in the percentage of total revenues represented by professional services revenues could have a detrimental impact on our overall gross margins, and could adversely affect our operating results. In addition, we sometimes subcontract professional services to third parties, which further reduce our gross margins on these professional services. As a result, an increase in the percentage of professional services provided by third-party consultants could lower our overall gross margins.
If our products contain errors or if new product releases are delayed, we could lose new sales and be sub- ject to significant liability claims. Because our software products are complex, they may contain undetected errors or defects, known as bugs. Bugs can be detected at any point in a product’s life cycle, but are more common when a new product is introduced or when new versions are released. In the past, we have encountered product development delays and defects in our products. We expect that, despite our testing, errors will be found in new products and product enhancements in the future. Significant errors in our products could lead to: • delays in or loss of market acceptance of our products; • diversion of our resources; • a lower rate of license renewals or upgrades; • injury to our reputation; and • increased service expenses or payment of damages. Because our clients use our products to store and retrieve critical information, we may be subject to significant liability claims if our products do not work properly. We cannot be certain that the limitations of liability set forth in our licenses and agreements would be enforceable or would otherwise protect us from liability for damages. A material liability claim against us, regardless of its merit or its outcome, could result in substantial costs, significantly harm our business reputation and divert management’s attention from our operations.
The length and unpredictability of the sales cycle for our software could delay new sales and cause our revenues and cash flows for any given quarter to fail to meet our projections or market expectations. The sales cycle between our initial contact with a potential client and the signing of a license with that client typically ranges from 6 to 15 months. As a result of this lengthy sales cycle, we have only a limited ability to forecast the timing of sales. A delay in or failure to complete license transactions could harm our business and financial results, and could cause our financial results to vary significantly from quarter to quarter. Our sales cycle varies widely, reflecting differences in our potential clients’ decision-making processes, procurement requirements and budget cycles, and is subject to significant risks over which we have little or no control, including: • clients’ budgetary constraints and priorities; • the timing of our clients’ budget cycles; • the need by some clients for lengthy evaluations that often include both their administrators and faculties; and • the length and timing of clients’ approval processes.
14 Potential clients typically conduct extensive and lengthy evaluations before committing to our products and services and generally require us to expend substantial time, effort and money educating them as to the value of our offerings.
Our sales cycle with international postsecondary education providers and U.S. K-12 schools may be longer than our historic U.S. postsecondary sales cycle, which could cause us to incur greater costs and could reduce our operating margins. As we target more of our sales efforts at international postsecondary education providers and U.S. K-12 schools, we could face greater costs, longer sales cycles and less predictability in completing some of our sales, which may harm our business. A potential client’s decision to use our products and services may be a decision involving multiple institutions and, if so, these types of sales would require us to provide greater levels of education to prospective clients regarding the use and benefits of our products and services. In addition, we expect that potential international postsecondary and U.S. K-12 clients may demand more customization, integration services and features. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual sales, thereby increasing the costs and time required to complete sales and diverting sales and professional services resources to a smaller number of international and U.S. K-12 transactions.
We may have exposure to greater than anticipated tax liabilities. We are subject to income taxes and other taxes in a variety of jurisdictions and are subject to review by both domestic and foreign taxation authorities. The determination of our provision for income taxes and other tax liabilities requires significant judgment and the ultimate tax outcome may differ from the amounts recorded in our consolidated financial statements, which may materially affect our financial results in the period or periods for which such determination is made.
Our ability to utilize our net operating loss carryforwards may be limited. Our federal net operating loss carryforwards are subject to limitations on how much may be utilized on an annual basis. The use of the net operating loss carryforwards may have additional limitations resulting from certain future ownership changes or other factors under Section 382 of the Internal Revenue Code. If our net operating loss carryforwards are further limited, and we have taxable income which exceeds the available net operating loss carryforwards for that period, we would incur an income tax liability even though net operating loss carryforwards may be available in future years prior to their expiration, and our future cash flow, financial position and financial results may be negatively impacted.
Our future success depends on our ability to continue to retain and attract qualified employees. Our future success depends upon the continued service of our key management, technical, sales and other critical personnel, including employees who joined Blackboard from WebCT. Whether we are able to execute effectively on our business strategy will depend in large part on how well key management and other personnel perform in their positions and are integrated within our company. Key personnel have left our company over the years, and there may be additional departures of key personnel from time to time. In addition, as we seek to expand our global organization, the hiring of qualified sales, technical and support personnel has been difficult due to the limited number of qualified professionals. Failure to attract, integrate and retain key personnel would result in disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives and the results of our operations.
Our move to our headquarters location may be delayed which would disrupt our operations and increase our expenses. On December 15, 2006, we entered into an office lease agreement for approximately 112,000 square feet of space in Washington DC to which we plan to relocate our headquarters. The timing of our move in will
15 depend on the date that the tenant currently occupying the building vacates the space. If the existing tenant delays its move, we will not be able to move in on schedule which would disrupt our operations. In the event of a significant delay, we would need to extend the lease at our existing headquarters, which we may not be able to obtain on terms favorable to us.
If we do not maintain the compatibility of our products with third-party applications that our clients use in conjunction with our products, demand for our products could decline. Our software applications can be used with a variety of third-party applications used by our clients to extend the functionality of our products, which we believe contributes to the attractiveness of our products in the market. If we are not able to maintain the compatibility of our products with third-party applications, demand for our products could decline, and we could lose sales. We may desire in the future to make our products compatible with new or existing third-party applications that achieve popularity within the education marketplace, and these third-party applications may not be compatible with our designs. Any failure on our part to modify our applications to ensure compatibility with such third-party applications would reduce demand for our products and services.
If we are unable to protect our proprietary technology and other rights, it will reduce our ability to com- pete for business. If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products similar to our products, which could decrease demand for our products. In addition, we may be unable to prevent the use of our products by persons who have not paid the required license fee, which could reduce our revenues. We rely on a combination of copyright, patent, trademark and trade secret laws, as well as licensing agreements, third-party nondisclosure agreements and other contractual provisions and technical measures, to protect our intellectual property rights. These protections may not be adequate to prevent our competitors from copying or reverse-engineering our products and these protections may be costly and difficult to enforce. Our competitors may independently develop technologies that are substantially equivalent or superior to our technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know- how or other proprietary information. The protective mechanisms we include in our products may not be sufficient to prevent unauthorized copying. Existing copyright laws afford only limited protection for our intellectual property rights and may not protect such rights in the event competitors independently develop products similar to ours. In addition, the laws of some countries in which our products are or may be licensed do not protect our products and intellectual property rights to the same extent as do the laws of the United States.
If we are found to infringe the proprietary rights of others, we could be required to redesign our products, pay significant royalties or enter into license agreements with third parties. A third party may assert that our technology violates its intellectual property rights. As the number of products in our markets increases and the functionality of these products further overlaps, we believe that infringement claims will become more common. Any claims, regardless of their merit, could: • be expensive and time consuming to defend; • force us to stop licensing our products that incorporate the challenged intellectual property; • require us to redesign our products and reimburse certain costs to our clients; • divert management’s attention and other company resources; and • require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies, which may not be available on terms acceptable to us, if at all.
16 Expansion of our business internationally will subject our business to additional economic and opera- tional risks that could increase our costs and make it difficult for us to operate profitably. One of our key growth strategies is to pursue international expansion. Expansion of our international operations may require significant expenditure of financial and management resources and result in increased administrative and compliance costs. As a result of such expansion, we will be increasingly subject to the risks inherent in conducting business internationally, including: • foreign currency fluctuations, which could result in reduced revenues and increased operating expenses; • potentially longer payment and sales cycles; • difficulty in collecting accounts receivable; • the effect of applicable foreign tax structures, including tax rates that may be higher than tax rates in the United States or taxes that may be duplicative of those imposed in the United States; • tariffs and trade barriers; • general economic and political conditions in each country; • inadequate intellectual property protection in foreign countries; • uncertainty regarding liability for information retrieved and replicated in foreign countries; • the difficulties and increased expenses in complying with a variety of foreign laws, regulations and trade standards; and • unexpected changes in regulatory requirements.
Unauthorized disclosure of data, whether through breach of our computer systems or otherwise, could expose us to protracted and costly litigation or cause us to lose clients. Maintaining the security of online education and transaction networks is of critical importance for our clients because these activities involve the storage and transmission of proprietary and confidential client and student information, including personal student information and consumer financial data, such as credit card numbers, and this area is heavily regulated in many countries in which we operate, including the United States. Individuals and groups may develop and deploy viruses, worms and other malicious software programs that attack or attempt to infiltrate our products. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, we could be subject to liability or our business could be interrupted. Penetration of our network security could have a negative impact on our reputation and could lead our present and potential clients to choose competing offerings and result in regulatory action against us. Even if we do not encounter a security breach ourselves, a well-publicized breach of the consumer data security of any major consumer Web site could lead to a general public loss of confidence in the use of the Internet, which could significantly diminish the attractiveness of our products and services.
Operational failures in our network infrastructure could disrupt our remote hosting service, could cause us to lose current hosting clients and sales to potential hosting clients and could result in increased expenses and reduced revenues. Unanticipated problems affecting our network systems could cause interruptions or delays in the delivery of the hosting service we provide to some of our clients. We provide remote hosting through computer hardware that is currently located in third-party co-location facilities in Virginia, The Netherlands and Canada. We do not control the operation of these co-location facilities. Lengthy interruptions in our hosting service could be caused by the occurrence of a natural disaster, power loss, vandalism or other telecommunications problems at the co-location facilities or if these co-location facilities were to close without adequate notice. Although we have multiple transmission lines into the co-location facilities through two telecommunications service providers, we have experienced problems of this nature from time to time in the past, and we will continue to be exposed to the risk of network failures in the future. We currently do not have adequate
17 computer hardware and systems to provide alternative service for most of our hosted clients in the event of an extended loss of service at the co-location facilities. Each Virginia co-location facility provides data backup redundancy for the other Virginia co-location facility. However, they are not equipped to provide full disaster recovery to all of our hosted clients. If there are operational failures in our network infrastructure that cause interruptions, slower response times, loss of data or extended loss of service for our remotely hosted clients, we may be required to issue credits or pay penalties, current hosting clients may terminate their contracts or elect not to renew them, and we may lose sales to potential hosting clients. If we determine that we need additional hardware and systems, we may be required to make further investments in our network infrastructure.
We could lose revenues if there are changes in the spending policies or budget priorities for government funding of colleges, universities, schools and other education providers. Most of our clients and potential clients are colleges, universities, schools and other education providers who depend substantially on government funding. Accordingly, any general decrease, delay or change in federal, state or local funding for colleges, universities, schools and other education providers could cause our current and potential clients to reduce their purchases of our products and services, to exercise their right to terminate licenses, or to decide not to renew licenses, any of which could cause us to lose revenues. In addition, a specific reduction in governmental funding support for products such as ours would also cause us to lose revenues.
U.S. and foreign government regulation of the Internet could cause us to incur significant expenses, and failure to comply with applicable regulations could make our business less efficient or even impossible. The application of existing laws and regulations potentially applicable to the Internet, including regulations relating to issues such as privacy, defamation, pricing, advertising, taxation, consumer protection, content regulation, quality of products and services and intellectual property ownership and infringement, can be unclear. It is possible that U.S., state and foreign governments might attempt to regulate Internet transmissions or prosecute us for violations of their laws. In addition, these laws may be modified and new laws may be enacted in the future, which could increase the costs of regulatory compliance for us or force us to change our business practices. Any existing or new legislation applicable to us could expose us to substantial liability, including significant expenses necessary to comply with such laws and regulations, and dampen the growth in use of the Internet. Specific federal laws that could also have an impact on our business include the following: • The Children’s Online Protection Act and the Children’s Online Privacy Protection Act restrict the distribution of certain materials deemed harmful to children and impose additional restrictions on the ability of online services to collect personal information from children under the age of 13; and • The Family Educational Rights and Privacy Act imposes parental or student consent requirements for specified disclosures of student information, including online information. Our clients’ use of our software as their central platform for online education initiatives may make us subject to any such laws or regulations, which could impose significant additional costs on our business or subject us to additional liabilities.
We may be subject to state and federal financial services regulation, and any violation of any present or future regulation could expose us to liability, force us to change our business practices or force us to stop selling or modify our products and services. Our transaction processing product and service offering could be subject to state and federal financial services regulation. The Blackboard Transaction System supports the creation and management of student debit accounts and the processing of payments against those accounts for both on-campus vendors and off-campus merchants. For example, one or more federal or state governmental agencies that regulate or monitor banks or other types of providers of electronic commerce services may conclude that we are engaged in banking or
18 other financial services activities that are regulated by the Federal Reserve under the U.S. Federal Electronic Funds Transfer Act or Regulation E thereunder or by state agencies under similar state statutes or regulations. Regulatory requirements may include, for example:
• disclosure of consumer rights and our business policies and practices;
• restrictions on uses and disclosures of customer information;
• error resolution procedures;
• limitations on consumers’ liability for unauthorized account activity;
• data security requirements;
• government registration; and
• reporting and documentation requirements.
A number of states have enacted legislation regulating check sellers, money transmitters or transaction settlement service providers as banks. If we were deemed to be in violation of any current or future regulations, we could be exposed to financial liability and adverse publicity or forced to change our business practices or stop selling some of our products and services. As a result, we could face significant legal fees, delays in extending our product and services offerings, and damage to our reputation that could harm our business and reduce demand for our products and services. Even if we are not required to change our business practices, we could be required to obtain licenses or regulatory approvals that could cause us to incur substantial costs.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters are located in Washington, D.C., where we lease approximately 63,000 square feet of space under a lease expiring in March 2008, and approximately 11,000 square feet of space under a lease expiring November 2009. We have leased approximately 112,000 square feet of space in Washing- ton, D.C. to which we plan to relocate our corporate headquarters in late 2007 or early 2008. We also lease offices in Phoenix, Arizona; Lynnfield, Massachusetts; Amsterdam; Vancouver; Tokyo; and Sydney.
Item 3. Legal Proceedings.
We are involved in various legal proceedings from time to time incidental to the ordinary conduct of our business. We are not currently involved in any legal proceeding the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
19 PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our common stock trades on the NASDAQ Global Market under the symbol “BBBB.” The following table sets forth, for the period indicated, the range of high and low closing sales prices for our common stock by quarter. High Low Year Ended December 31, 2005: First Quarter ...... $18.57 $13.54 Second Quarter...... 24.32 16.99 Third Quarter ...... 25.94 21.36 Fourth Quarter ...... 32.53 22.30 Year Ended December 31, 2006: First Quarter ...... 32.24 25.75 Second Quarter...... 32.98 23.46 Third Quarter ...... 29.49 25.23 Fourth Quarter ...... 30.12 25.98 As of January 31, 2007 there were approximately 164 holders of record of our outstanding common stock. We have not paid or declared any cash dividends on our common stock. We currently expect to retain all of our earnings for use in developing our business and do not anticipate paying any cash dividends in the foreseeable future. Future cash dividends, if any, will be paid at the discretion of our board of directors and will depend, among other things, upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and such other factors as our board of directors may deem relevant. We did not repurchase any of our equity securities in 2006. The equity compensation plan information required under this Item is incorporated by reference to the information provided under the heading “Equity Compensation Plan Information” in our proxy statement to be filed within 120 days after the fiscal year end of December 31, 2006.
20 STOCK PERFORMANCE GRAPH
The following graph compares the yearly change in the cumulative total stockholder return on our common stock during the period from June 18, 2004 (the date of our initial public offering) through December 31, 2006, with the cumulative total return on a SIC Index that includes all organizations in the Standard Industrial Classification (SIC) Code 7372-Prepackaged Software (the “SIC Code Index”) and a NASDAQ Market Index. The comparison assumes that $100 was invested on June 18, 2004 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any.
COMPARE CUMULATIVE TOTAL RETURN AMONG BLACKBOARD INC. NASDAQ MARKET INDEX AND SIC CODE INDEX
175 Blackboard Inc. 150 SIC Code Index
125 NASDAQ Market Index
100
75
DOLLARS 50
25
0 6/18/2004 12/31/2004 12/31/2005 12/31/2006
Assumes $100 invested on June 18, 2004 Assumes dividends reinvested Fiscal year ending December 31, 2006
6/18/2004 12/31/2004 12/31/2005 12/31/2006 Blackboard Inc. $100.00 $ 74.01 $144.83 $150.12 SIC Code Index 100.00 107.82 106.14 121.83 NASDAQ Market Index 100.00 106.69 109.04 120.23
(1) This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing by us under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. (2) The stock price performance shown on the graph is not necessarily indicative of future price performance. Information used in the graph was obtained from Hemscott Inc., a source believed to be reliable, but we are not responsible for any errors or omissions in such information. (3) The hypothetical investment in our common stock presented in the stock performance graph above is based on an assumed initial price of $20.01 per share, the closing price on June 18, 2004, the date of our initial public offering. The stock sold in our initial public offering was issued at a price to the public of $14.00 per share.
21 Item 6. Selected Financial Data. The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the related notes, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this annual report. The statement of operations data for the years ended December 31, 2002, 2003, 2004, 2005 and 2006, and the balance sheet data as of December 31, 2002, 2003, 2004, 2005 and 2006, are derived from, and are qualified by reference to, our audited consolidated financial statements that have been audited by Ernst & Young, LLP, our independent registered public accounting firm. Year Ended December 31, 2002 2003 2004 2005 2006 (In thousands, except per share amounts) Statement of operations data: Revenues: Product ...... $62,388 $ 83,331 $ 98,632 $120,389 $160,392 Professional services ...... 7,558 9,147 12,771 15,275 22,671 Total revenues ...... 69,946 92,478 111,403 135,664 183,063 Operating expenses: Cost of product revenues, excludes $3,467, $3,467, $1,567, $0 and $9,333 of amortization of acquired technology included in amortization of intangibles resulting from acquisitions shown below for the years ended December 31, 2002, 2003, 2004, 2005 and 2006, respectively(1) . . . . 21,526 23,079 25,897 29,607 39,594 Cost of professional services revenues(1)...... 5,742 6,628 7,962 10,220 16,001 Research and development(1) ...... 10,272 11,397 13,749 13,945 27,162 Sales and marketing(1) ...... 24,176 30,908 35,176 37,873 58,340 General and administrative(1) ...... 16,938 15,050 15,069 19,306 35,823 Amortization of intangibles resulting from acquisitions ...... 5,519 5,757 3,517 266 17,969 Total operating expenses ...... 84,173 92,819 101,370 111,217 194,889 (Loss) income from operations ...... (14,227) (341) 10,033 24,447 (11,826) Interest (expense) income, net ...... (509) (470) 315 3,097 (2,974) Other expense ...... — — — — (519) (Loss) income before (provision) benefit for income taxes and cumulative change in accounting principle ...... (14,736) (811) 10,348 27,544 (15,319) (Provision) benefit for income taxes ...... (283) (614) (299) 14,309 4,582 (Loss) income before cumulative change in accounting principle ...... (15,019) (1,425) 10,049 41,853 (10,737) Cumulative change in accounting principle ...... (26,632) ———— Net (loss) income ...... (41,651) (1,425) 10,049 41,853 (10,737) Dividends on and accretion of convertible preferred stock ...... (9,699) (10,077) (6,344) — — Net (loss) income attributable to common stockholders ...... $(51,350) $(11,502) $ 3,705 $ 41,853 $ (10,737)
22 Year Ended December 31, 2002 2003 2004 2005 2006 (In thousands, except per share amounts) Net (loss) income attributable to common stockholders per common share: Basic ...... $ (9.40) $ (2.09) $ 0.23 $ 1.57 $ (0.39) Diluted ...... $ (9.40) $ (2.09) $ 0.21 $ 1.47 $ (0.39) Weighted average number of common shares: Basic ...... 5,460 5,516 16,072 26,715 27,858 Diluted ...... 5,460 5,516 17,864 28,510 27,858
(1) Includes the following amounts related to stock-based compensation: Cost of product revenues ...... $ — $ — $ — $ — $ 386 Cost of professional services revenues ...... — — — — 524 Research and development ...... — — — — 733 Sales and marketing ...... — — — — 2,951 General and administrative ...... 474 319 174 75 3,462 The following table sets forth a summary of our balance sheet data: December 31, 2002 2003 2004 2005 2006 (In thousands) Balance sheet data: Cash and cash equivalents ...... $ 20,372 $ 30,456 $ 78,149 $ 75,895 $ 30,776 Short-term investments ...... — — 20,000 62,602 — Working capital (deficit)...... (9,402) (13,001) 53,026 93,388 (36,976) Total assets ...... 71,140 83,054 148,398 224,188 307,299 Deferred revenues, current portion ...... 37,342 51,215 63,901 74,975 117,972 Total debt ...... 11,855 11,564 762 — 23,623 Mandatorily redeemable convertible preferred stock and Series E warrants ...... 120,221 130,297 — — — Total stockholders’ (deficit) equity ...... (113,403) (124,617) 69,107 130,325 140,121
23 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that are based on our current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risks Related to Our Business” and elsewhere in this annual report.
General We are a leading provider of enterprise software applications and related services to the education industry. Our clients use our software to integrate technology into the education experience and campus life, and to support activities such as a professor assigning digital materials on a class website; a student collaborating with peers or completing research online; an administrator managing a departmental website; or a merchant conducting cash-free transactions with students and faculty through pre-funded debit accounts. Our clients include colleges, universities, schools and other education providers, as well as textbook publishers and student-focused merchants who serve these education providers and their students. We generate revenues from sales and licensing of products and from professional services. Our product revenues consist principally of revenues from annual software licenses, client hosting engagements and the sale of bundled software-hardware systems. We typically sell our licenses and hosting services under annually renewable agreements, and our clients generally pay the annual fees at the beginning of the contract term. We recognize revenues from these agreements, as well as revenues from bundled software-hardware systems, which do not recur, ratably over the contractual term, which is typically 12 months. Billings associated with licenses and hosting services are recorded initially as deferred revenues and then recognized ratably into revenues over the contract term. We also generate product revenues from the sale and licensing of third party software and hardware that is not bundled with our software. These revenues are generally recognized upon shipment of the products to our clients. We derive professional services revenues primarily from training, implementation, installation and other consulting services. Substantially all of our professional services are performed on a time-and-materials basis. We recognize these revenues as the services are performed. We typically license our individual applications either on a stand-alone basis or bundled as part of either of two suites, the Blackboard Academic SuiteTM and the Blackboard Commerce SuiteTM. The Blackboard Academic Suite includes the products formerly known as WebCT Campus EditionTM and WebCT VistaTM, which were acquired in our merger with WebCT, Inc. We generally price our software licenses on the basis of full-time equivalent students or users. Accordingly, annual license fees are generally greater for larger institutions. Our operating expenses consist of cost of product revenues, cost of professional services revenues, research and development expenses, sales and marketing expenses, general and administrative expenses and amortization of intangibles resulting from acquisitions. Major components of our cost of product revenues include license and other fees that we owe to third parties upon licensing software, and the cost of hardware that we bundle with our software. We initially defer these costs and recognize them into expense over the period in which the related revenue is recognized. Cost of product revenues also includes amortization of internally developed technology available for sale, employee compensation, stock-based compensation and benefits for personnel supporting our hosting, support and production functions, as well as related facility rent, communication costs, utilities, depreciation expense and cost of external professional services used in these functions. All of these costs are expensed as incurred. The costs of third-party software and hardware that is not bundled with software are also expensed when incurred, normally upon delivery to our client. Cost of product revenues excludes amortization of acquired technology intangibles resulting from acquisitions, which is included as amortization of intangibles resulting from acquisitions.
24 Cost of professional services revenues primarily includes the costs of compensation, stock-based compensation and benefits for employees and external consultants who are involved in the performance of professional services engagements for our clients, as well as travel and related costs, facility rent, communi- cation costs, utilities and depreciation expense used in these functions. All of these costs are expensed as incurred. Research and development expenses include the costs of compensation, stock-based compensation and benefits for employees who are associated with the creation and testing of the products we offer, as well as the costs of external professional services, travel and related costs attributable to the creation and testing of our products, related facility rent, communication costs, utilities and depreciation expense. All of these costs are expensed as incurred. Sales and marketing expenses include the costs of compensation, including bonuses and commissions, stock-based compensation and benefits for employees who are associated with the generation of revenues, as well as marketing expenses, costs of external marketing-related professional services, investor relations, facility rent, utilities, communications, travel attributable to those sales and marketing employees in the generation of revenues and bad debt expense. All of these costs are expensed as incurred. General and administrative expenses include the costs of compensation, stock-based compensation and benefits for employees in the human resources, legal, finance and accounting, management information systems, facilities management, executive management and other administrative functions that are not directly associated with the generation of revenues or the creation and testing of products. In addition, general and administrative expenses include the costs of external professional services and insurance, as well as related facility rent, communication costs, utilities and depreciation expense used in these functions. Amortization of intangibles includes the amortization of costs associated with products, acquired technology, customer lists, non-compete agreements and other identifiable intangible assets. These intangible assets were recorded at the time of our acquisitions and relate to contractual agreements, technology and products that we continue to utilize in our business.
Critical Accounting Policies and Estimates The discussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. During the preparation of these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, bad debts, fixed assets, long-lived assets, including purchase accounting and goodwill, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements. Our critical accounting policies have been discussed with the audit committee of our board of directors. We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements: Revenue recognition. Our revenues are derived from two sources: product sales and professional services sales. Product revenues include software license, hardware, premium support and maintenance, and hosting revenues. Professional services revenues include training and consulting services. We recognize software license and maintenance revenues in accordance with the American Institute of Certified Public Accountants’ Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as modified by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.” Our software does not require significant modification and customization services. Where services are not essential to the functional- ity of the software, we begin to recognize software licensing revenues when all of the following criteria are
25 met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed and determinable; and (4) collectibility is probable. We do not have vendor-specific objective evidence, or VSOE, of fair value for our support and maintenance separate from our software. Accordingly, when licenses are sold in conjunction with our support and maintenance, we recognize the license revenue over the term of the maintenance service period. We sell hardware in two types of transactions: sales of hardware in conjunction with our software licenses, which we refer to as bundled hardware-software systems, and sales of hardware without software, which generally involve the resale of third-party hardware. After any necessary installation services are performed, hardware revenues are recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed and determinable; and (4) collectibility is probable. We have not determined VSOE of the fair value for the separate components of bundled hardware-software systems. Accordingly, when a bundled hardware-software system is sold, all revenue is recognized over the term of the maintenance service period. Hardware sales without software are recognized upon delivery of the hardware to our client. Hosting revenues are recorded in accordance with Emerging Issues Task Force (EITF) 00-3, “Application of AICPA SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware.” We recognize hosting fees and set-up fees ratably over the term of the hosting agreement. We recognize professional services revenues, which are generally contracted on a time-and-materials basis and consist of training, implementation and installation services, as the services are provided. We do not offer specified upgrades or incrementally significant discounts. Advance payments are recorded as deferred revenues until the product is shipped, services are delivered or obligations are met and the revenue can be recognized. Deferred revenues represent the excess of amounts invoiced over amounts recognized as revenues. We provide non-specified upgrades of our product only on a when-and-if-available basis. Any contingencies, such as rights of return, conditions of acceptance, warranties and price protection, are accounted for under SOP 97-2. The effect of accounting for these contingencies included in revenue arrangements has not been material. Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability, failure or refusal of our clients to make required payments. We analyze accounts receivable, historical percentages of uncollectible accounts and changes in payment history when evaluating the adequacy of the allowance for doubtful accounts. We use an internal collection effort, which may include our sales and services groups as we deem appropriate, in our collection efforts. Although we believe that our reserves are adequate, if the financial condition of our clients deteriorates, resulting in an impairment of their ability to make payments, or if we underestimate the allowances required, additional allowances may be necessary, which will result in increased expense in the period in which such determination is made. Short-term investments. All investments with original maturities of greater than 90 days are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company determines the appropriate classification at the time of purchase and reevaluates such designation as of each balance sheet date. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity under the effective interest method. Such amortization is recorded as interest income. Interest on held-to-maturity securities is recorded as interest income. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses, if any, reported in other comprehensive income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are recorded as other income (expense) in the consolidated statements of operations. Long-lived assets. We record our long-lived assets, such as property and equipment, at cost. We review the carrying value of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We evaluate these assets by examining estimated future cash flows to determine if their current recorded value is impaired.
26 We evaluate these cash flows by using weighted probability techniques as well as comparisons of past performance against projections. Assets may also be evaluated by identifying independent market values. If we determine that an asset’s carrying value is impaired, we will record a write-down of the carrying value of the identified asset and charge the impairment as an operating expense in the period in which the determination is made. Although we believe that the carrying values of our long-lived assets are appropriately stated, changes in strategy or market conditions or significant technological developments could significantly impact these judgments and require adjustments to recorded asset balances. Goodwill and intangible assets. As the result of acquisitions, any excess purchase price over the net tangible and identifiable intangible assets acquired is recorded as goodwill. A preliminary allocation of the purchase price to tangible and intangible net assets acquired is based upon a preliminary valuation and our estimates and assumptions may be subject to change. We assess the impairment of goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Accordingly, we test our goodwill for impairment annually on October 1, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its fair value to its carrying value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. If we determine that an impairment has occurred, we are required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. Although we believe goodwill is appropriately stated in our consolidated financial statements, changes in strategy or market conditions could significantly impact these judgments and require an adjustment to the recorded balance. The costs of defending and protecting patents are capitalized. All costs incurred to the point when a patent application is to be filed is expensed as incurred. Intangible assets are amortized using the straight-line method over the following estimated useful lives of the assets: Acquired technology ...... 3years Contracts and customer lists...... 3to5years Non-compete agreements ...... Termofagreement Trademarks and domain names ...... 3years Patents and related costs ...... Life of patent On February 28, 2006, we completed our merger with WebCT pursuant to the Agreement and Plan of Merger dated as of October 12, 2005. Pursuant to the Agreement and Plan of Merger, we acquired all the outstanding common stock of WebCT in a cash transaction for approximately $178.3 million. The effective cash purchase price of WebCT before transaction costs was approximately $150.4 million, net of WebCT’s February 28, 2006 cash balance of approximately $27.9 million. We have included the financial results of WebCT in our consolidated financial statements beginning February 28, 2006. The merger was accounted for under the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations.” Assets acquired and liabilities assumed were recorded at their fair values as of February 28, 2006. The total purchase price was $187.5 million, including the acquisition-related transaction costs of approximately $9.2 million. Acquisition-related transaction costs include investment banking, legal and accounting fees, and other external costs directly related to the merger.
27 Under the purchase method of accounting, the total estimated purchase price as shown in the table below was allocated to WebCT’s net tangible and intangible assets based on their estimated fair values as of February 28, 2006. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill. The allocation of the purchase price was based upon a valuation and our estimates and assumptions are subject to change. The areas of the purchase price allocation that are not yet finalized relate primarily to income and non-income based taxes. In addition, upon the finalization of the combined company’s legal entity structure, additional adjustments to deferred taxes may be required. Based on independent third party valuations, and other factors as described above, the estimated purchase price was allocated as follows (in thousands): Cash and cash equivalents ...... $ 27,880 Restricted cash ...... 1,452 Accounts receivable, net ...... 4,369 Prepaid expenses and other current assets ...... 1,356 Property and equipment, net ...... 1,720 Deferred tax assets, net...... 1,398 Accounts payable ...... (272) Other accrued liabilities ...... (10,687) Deferred revenues ...... (4,456) Net tangible assets to be acquired ...... 22,760 Definite-lived intangible assets acquired ...... 73,307 Goodwill ...... 91,392 Total estimated purchase price ...... $187,459
Of the total estimated purchase price, $22.8 million has been allocated to net tangible assets and $73.3 million has been allocated to definite-lived intangible assets acquired. Definite-lived intangible assets of $73.3 million consist of the value assigned to WebCT’s customer relationships of $39.6 million and developed and core technology of $33.7 million. The value assigned to WebCT’s customer relationships was determined by discounting the estimated cash flows associated with the existing customers as of the acquisition date taking into consideration expected attrition of the existing customer base. The estimated cash flows were based on revenues for those existing customers net of operating expenses and net contributory asset charges associated with servicing those customers. The estimated revenues were based on revenue growth rates and customer renewal rates. Operating expenses were estimated based on the supporting infrastructure expected to sustain the assumed revenue growth rates. Net contributory asset charges were based on the estimated fair value of those assets that contribute to the generation of the estimated cash flows. A discount rate of 16% was deemed appropriate for valuing the existing customer base. We are amortizing the value of customer relationships proportionally to the respective discounted cash flows over an estimated useful life of five years. Customer relationships are not deductible for tax purposes. Developed and core technology, which is comprised of products that have reached technological feasibility, includes products in WebCT’s product line. The value assigned to WebCT’s developed and core technology was determined by discounting the estimated future cash flows associated with the existing and core technologies to their present value. The revenue estimates used to value the developed and core technology were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by us and our competitors. The rates utilized to discount the net cash flows of developed and core technology to their present value were based on the risks associated with the respective cash flows taking into consideration our weighted average cost of capital. A discount rate of 16% was deemed appropriate for valuing developed and core technology. We are amortizing the developed and core technology on a straight-line basis over an estimated useful life of three years. Developed and core technology are not deductible for tax purposes.
28 Of the total estimated purchase price, approximately $91.4 million has been allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for tax purposes.
As a result of the WebCT acquisition, we recorded net deferred tax assets of approximately $1.4 million in purchase accounting. This balance is comprised primarily of $37.0 million of deferred tax assets related to federal net operating losses, capitalized research and development, and certain amortization and depreciation expenses. The deferred tax assets are offset by $35.6 million in deferred tax liabilities resulting primarily from the related intangibles identified from the acquisition and the reduction in WebCT deferred revenues resulting from purchase accounting.
In connection with the purchase price allocation, the estimated fair value of the support obligation assumed from WebCT in connection with the acquisition was determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to fulfilling the obligation plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the support obligation. The estimated costs to fulfill the support obligation were based on the historical direct costs related to providing the support services and to correct any errors in WebCT software products. These estimated costs did not include any costs associated with selling efforts or research and development or the related fulfillment margins on these costs. Profit associated with selling efforts is excluded because WebCT had concluded the selling effort on the support contracts prior to February 28, 2006. The estimated normal profit margin was determined to be 19%. As a result, in allocating the acquisition purchase price, we recorded an adjustment to reduce the carrying value of WebCT’s February 28, 2006 deferred support revenue by approximately $14.3 million to $4.5 million which represents our estimate of the fair value of the support obligation assumed. As former WebCT customers renew these support contracts, we will recognize revenue for the full value of the support contracts over the remaining term of the contracts, the majority of which are one year.
We have currently not identified any material pre-acquisition contingencies where a liability is probable and the amount of the liability can be reasonably estimated. If information becomes available prior to the end of the purchase price allocation period, which would indicate that it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the purchase price allocation.
The unaudited financial information in the table below summarizes our combined results of operations and WebCT on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition and borrowings under the our senior secured credit facilities with Credit Suisse (see Note 7 of Notes to Consolidated Financial Statements) had taken place as of the beginning of each of the periods presented. The pro forma financial information for all periods presented also includes amortization expense from acquired intangible assets, adjustments to interest expense, interest income and related tax effects.
The unaudited pro forma financial information for the year ended December 31, 2006 combines our historical results for the year ended December 31, 2006 and the historical results for WebCT for the period from January 1, 2006 to February 28, 2006. The unaudited pro forma financial information for the year ended December 31, 2005 combines our historical results for the year ended December 31, 2005 and the historical results for WebCT for the same period.
2005 2006 (In thousands, except per share amounts) (Unaudited) Total revenues ...... $182,963 $191,069 Net income (loss) ...... $ 25,332 $ (14,936) Basic net income (loss) per common share ...... $ 0.95 $ (0.54) Diluted net income (loss) per common share ...... $ 0.89 $ (0.54)
29 Deferred Income Taxes. Deferred tax assets and liabilities are determined based on temporary differ- ences between the financial reporting bases and the tax bases of assets and liabilities. Deferred tax assets are also recognized for tax net operating loss carryforwards. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized. The realization of total deferred tax assets is contingent upon the generation of future taxable income. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.
Income tax provision includes U.S. federal, state and local income taxes and is based on pre-tax income or loss. The provision or benefit for income taxes is based upon our estimate of our annual effective income tax rate. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes and our ability to use tax credits and net operating loss carryforwards.
Stock-Based Compensation. Prior to January 1, 2006, we accounted for our stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and related interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2005), “Share-Based Payment” (SFAS 123R), using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized in fiscal 2006 includes: (a) compensation cost for all equity-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation cost for all equity- based payments granted subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.
As a result of adopting SFAS 123R on January 1, 2006, our loss before benefit for income taxes and net loss for the year ended December 31, 2006 were approximately $8.1 million and $5.7 million more, respectively, than if we had continued to account for stock-based compensation under APB No. 25. Basic and diluted net loss per common share for the year ended December 31, 2006 were each approximately $0.20 more than if we had not adopted SFAS 123R. The related total income tax benefit recognized in the consolidated statements of operations was approximately $3.3 million for the year ended December 31, 2006 and is classified as financing cash flows.
As of December 31, 2006, there was approximately $42.5 million of total unrecognized compensation cost related to unvested stock options granted under our option plans. The cost is expected to be recognized through February 2013 with a weighted average recognition period of approximately 3.4 years.
Recent Accounting Pronouncements. In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income taxes — an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” It prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold should be measured as the largest amount of the tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of FIN 48 on our consolidated results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. It clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of SFAS 157 on our consolidated results of operations and financial condition.
30 Important Factors Considered by Management We consider several factors in evaluating both our financial position and our operating performance. These factors, while primarily focused on relevant financial information, also include other measures such as general market and economic conditions, competitor information and the status of the regulatory environment. To understand our financial results, it is important to understand our business model and its impact on our consolidated financial statements. The accounting for the majority of our contracts requires us to initially record deferred revenues on our consolidated balance sheet upon invoicing the sale and then to recognize revenue in subsequent periods ratably over the term of the contract in our consolidated statements of operations. Therefore, to better understand our operations, one must look at both revenues and deferred revenues. In evaluating our revenues, we analyze them in three categories: recurring ratable revenues, non-recurring ratable revenues and other revenues. • Recurring ratable revenues include those product revenues that are recognized ratably over the contract term, which is typically one year, and that recur each year assuming clients renew their contracts. These revenues include revenues from the licensing of all of our software products, hosting arrangements and enhanced support and maintenance contracts related to our software products, including certain professional services performed by our professional services groups. • Non-recurring ratable revenues include those product revenues that are recognized ratably over the term of the contract, which is typically one year, but that do not contractually recur. These revenues include certain hardware components of our Blackboard Transaction System products and certain third-party hardware and software sold to our clients in conjunction with our software licenses. • Other revenues include those revenues that are recognized as earned and are not deferred to future periods. These revenues include professional services, the sales of Blackboard One, as well as the supplies and commissions we earn from publishers related to digital course supplement downloads. In the case of both recurring ratable revenues and non-recurring ratable revenues, an increase or decrease in the revenues in one period would be attributable primarily to increases or decreases in sales in prior periods. Unlike recurring ratable revenues, which benefit both from new license sales and from the renewal of previously existing licenses, non-recurring ratable revenues primarily reflect one-time sales that do not contractually renew. Other factors that we consider in making strategic cash flow and operating decisions include cash flows from operations, capital expenditures, total operating expenses and earnings.
31 Results of Operations The following table sets forth selected statement of operations data expressed as a percentage of total revenues for each of the periods indicated. Year Ended December 31, 2004 2005 2006 Revenues: Product ...... 89% 89% 88% Professional services ...... 11 11 12 Total revenues ...... 100 100 100 Operating expenses: Cost of product revenues ...... 23 22 22 Cost of professional services revenues ...... 7 8 9 Research and development ...... 12 10 15 Sales and marketing ...... 32 28 32 General and administrative ...... 14 14 19 Amortization of intangibles resulting from acquisitions ...... 3 0 9 Total operating expenses...... 91 82 106 Operating margin...... 9% 18% (6)%
The following table sets forth, for each component of revenues, the cost of these revenues expressed as a percentage of the related revenues for each of the periods indicated. Year Ended December 31, 2004 2005 2006 Cost of product revenues ...... 26% 25% 25% Cost of professional services revenues ...... 62% 67% 71%
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 Revenues. Our total revenues for the year ended December 31, 2006 were $183.1 million, representing an increase of $47.4 million, or 34.9%, as compared to total revenues of $135.7 million for the year ended December 31, 2005. A detail of our total revenues by classification is as follows:
2005 2006 Product Professional Product Professional Revenues Services Revenues Total Revenues Services Revenues Total (In millions) (Unaudited) Recurring ratable revenues ...... $ 95.7 $ 0.9 $ 96.6 $130.4 $ 2.3 $132.7 Non-recurring ratable revenues . . . . 18.1 — 18.1 20.0 — 20.0 Other revenues...... 6.6 14.4 21.0 10.0 20.4 30.4 Total revenues ...... $120.4 $15.3 $135.7 $160.4 $22.7 $183.1
Product revenues. Product revenues, including domestic and international, for the year ended Decem- ber 31, 2006 were $160.4 million, representing an increase of $40.0 million, or 33.2%, as compared to $120.4 million for the year ended December 31, 2005. Recurring ratable product revenues increased by $34.8 million, or 36.3%, for the year ended December 31, 2006 as compared to the year ended December 31, 2005. Product revenues from the Blackboard Academic Suite increased $27.4 million, or 43.4%, for the year
32 ended December 31, 2006 as compared to the year ended December 31, 2005. This increase in Blackboard Academic Suite revenues was primarily due to a $21.7 million increase in revenues from Blackboard Learning System enterprise products, a $3.4 million increase in revenue from Blackboard Content System licenses and a $2.0 million increase in revenue from Blackboard Community System licenses. Product revenues from the Blackboard Commerce Suite increased by $1.6 million due to an increase in revenues from Blackboard Transaction System licenses. The further increase in recurring ratable product revenues was due to a $4.5 million increase in hosting revenues and a $1.2 million increase in revenues from enhanced support and maintenance revenues related to our software products. These increases in recurring ratable product revenues were attributable to current and prior period sales to new and existing clients, including clients resulting from the WebCT merger. As of December 31, 2006, we had a 53% increase in the number of clients as compared to December 31, 2005, primarily as a result of the WebCT acquisition. Further, during 2006, our clients renewed or upgraded approximately 92% of the renewable license dollars eligible to be renewed during 2006, which was consistent with 2005.
The increase in Blackboard Learning System enterprise product revenue was also attributable to the continued shift from the Blackboard Learning System basic products to the Blackboard Learning System enterprise products and cross-selling other enterprise products to existing clients. The Blackboard Learning System enterprise products have additional functionality that is not available in the Blackboard Learning System basic products and consequently some Blackboard Learning System basic product clients upgrade to the Blackboard Learning System enterprise products. Licenses of the enterprise version of the Blackboard Learning System enterprise products have higher average pricing, which normally results in at least twice the contractual value as compared to Blackboard Learning System basic product licenses.
The increase in non-recurring ratable product revenues was primarily due to an increase in non-recurring third party hardware and software revenues.
The increase in other product revenues was primarily due to a $1.8 million increase in publisher revenues attributable to WebCT publisher relationships, a $700,000 increase in non-ratable, non-recurring third party hardware and software revenues and a $500,000 increase in Blackboard One revenues due to an increase in current period sales.
Of our total revenues, our total international revenues for the year ended December 31, 2006 were $34.7 million, representing an increase of $12.8 million, or 58.4%, as compared to $21.9 million for the year ended December 31, 2005. International product revenues, which consist primarily of recurring ratable product revenues, were $30.8 million, representing an increase of $10.8 million, or 54.0%, as compared to $20.0 mil- lion for the year ended December 31, 2005. The increase in international revenues was driven primarily by an increase in recurring ratable product revenues. This increase was primarily due to an increase in international revenues from Blackboard Academic Suite products resulting from prior period sales to new and existing clients. The increase in international Blackboard Academic Suite revenues was primarily attributable to the same factors that contributed to the increase in overall Blackboard Academic Suite revenues. The further increase in total international revenues was attributable to an increase in professional services revenues due to the increase in the number of international licensees of our Blackboard Academic Suite products, which generally purchase greater volumes of our service offerings. In addition, the increase in international revenues also reflects our investment in increasing the size of our international sales force and international marketing efforts during prior periods, which expanded our international presence and enabled us to sell more of our products to new and existing clients in our international markets.
Professional services revenues. Professional services revenues for the year ended December 31, 2006, were $22.7 million, representing an increase of $7.4 million, or 48.4%, as compared to $15.3 million for the year ended December 31, 2005. The increase in professional services revenues was primarily attributable to an increase in the number and size of service engagements, which was directly related to the increase in the number of licensees primarily associated with the WebCT merger, particularly in the number of enterprise product licensees, which generally purchase greater volumes of our service offerings and increased sales of certain enhanced support and maintenance services. As a percentage of total revenues, professional services revenues for the year ended December 31, 2006 were 12.4%, as compared to 11.3% for the year ended
33 December 31, 2005. As a result of the fair value adjustment to the acquired WebCT deferred revenue balances, the percentage of professional services revenues was higher than in prior periods. We do not expect this trend to continue in future periods and we expect the percentage of professional services revenues to decrease as a percentage of total revenues.
Cost of product revenues. Our cost of product revenues for the year ended December 31, 2006 was $39.6 million, representing an increase of $10.0 million, or 33.7%, as compared to $29.6 million for the year ended December 31, 2005. The increase in cost of product revenue was primarily due to a $4.7 million increase in our technical support expense primarily due to increased personnel costs related to increased headcount related to new hires during 2005 and 2006, higher average salaries due to annual salary increases in 2006 and the inclusion of WebCT’s technical support groups. In addition, there was a $3.6 million increase in expenses for our hosting services due to the increase in the number of clients, including WebCT clients, contracting for our hosting services. Further, the increase was due to a $1.3 million increase in third party hardware and software costs primarily associated with third party products sold with the Blackboard Transaction System and $386,000 in stock-based compensation included in cost of product revenues for the year ended December 31, 2006. Cost of product revenues as a percentage of product revenues increased to 24.7% for the year ended December 31, 2006 from 24.6% for the year ended December 31, 2005. As a result of the fair value adjustment to the acquired WebCT deferred revenue balances, the percentage of cost of product revenues was higher than in prior periods. We do not expect this trend to continue in future periods and we expect the percentage of cost of product revenues to decrease as a percentage of total revenues.
Cost of product revenues excludes amortization of acquired technology intangibles resulting from acquisitions, which is included as amortization of intangibles resulting from acquisitions. Amortization expense related to acquired technology for the year ended December 31, 2006 was $9.3 million. There was no amortization expense related to acquired technology for the year ended December 31, 2005. Cost of product revenues, including amortization of acquired technology, as a percentage of product revenues was 30.5% for the year ended December 31, 2006 as compared to 24.6% for the year ended December 31, 2005.
Cost of professional services revenues. Our cost of professional services revenues for the year ended December 31, 2006 was $16.0 million, representing an increase of $5.8 million, or 56.6%, from $10.2 million for the year ended December 31, 2005. The increase in cost of professional services revenues was directly related to the increase in professional services revenues. Cost of professional services revenues as a percentage of professional services revenues increased to 70.6% for the year ended December 31, 2006 from 66.9% for the year ended December 31, 2005. The decrease in professional services revenues margin was primarily due to $524,000 in stock-based compensation included in cost of professional services revenues for the year ended December 31, 2006.
Research and development expenses. Our research and development expenses for the year ended December 31, 2006 were $27.2 million, representing an increase of $13.2 million, or 94.8%, as compared to $13.9 million for the year ended December 31, 2005. This increase was primarily attributable to an $11.0 million increase in personnel-related costs due to increased headcount related to new hires during 2005 and 2006, higher average salaries due to annual salary increases in 2006 and the inclusion of WebCT’s research and development groups, including approximately $1.2 million in severance costs. In addition, there was a $1.5 million increase in professional services costs resulting from our continued efforts to increase the functionality of our products. Further, for the year ended December 31, 2006 there was $733,000 in stock- based compensation included in research and development expenses.
Sales and marketing expenses. Our sales and marketing expenses for the year ended December 31, 2006 were $58.3 million, representing an increase of $20.5 million or 54.0%, as compared to sales and marketing expense of $37.9 million for the year ended December 31, 2005. This increase was primarily attributable to a $11.9 million increase in personnel costs primarily due to increased headcount related to new hires during 2005 and 2006, higher average salaries due to annual salary increases in 2006 and the inclusion of WebCT’s sales and marketing groups. Further, there was a $2.1 million increase in general marketing activities primarily associated with a larger annual Blackboard users conference in February 2006 and WebCT users conference in
34 July 2006. In addition, there was a $1.4 million change in bad debt expense for the year ended December 31, 2006 as compared to the year ended December 31, 2005 due to a $1.2 million reduction in bad debt expense recorded during the year ended December 31, 2005 as compared to $200,000 of bad debt expense recorded during the year ended December 31, 2006. Further, there was $3.0 million in stock-based compensation included in sales and marketing expenses for the year ended December 31, 2006. General and administrative expenses. Our general and administrative expenses for the year ended December 31, 2006 were $35.8 million, representing an increase of $16.5 million, or 85.6%, as compared to general and administrative expenses of $19.3 million for the year ended December 31, 2005. This increase was primarily attributable to a $7.5 million increase in personnel costs due to increased headcount related to new hires during 2005 and 2006, higher average salaries across all general and administrative functional departments due to annual salary increases in 2006 and the inclusion of WebCT general and administrative functional departments, including approximately $2.2 million in retention bonuses and severance costs primarily for WebCT employees. Further, there was an increase of approximately $2.8 million in facility expenses, including rent, utilities, repairs and maintenance expenses, related to an increase in office space at our Washington, D.C. headquarters and international locations during 2005 and 2006, as well as the inclusion of WebCT office space in Lynnfield, MA and Canada. There was an increase of approximately $2.5 million in professional service expenses during the year ended December 31, 2006 primarily associated with increased legal, accounting and integration costs resulting from the acquisition of WebCT. For the year ended December 31, 2006, there was $3.5 million in stock-based compensation included in general and administra- tive expenses. Net interest income (expense). Our net interest expense for the year ended December 31, 2006 was $3.0 million as compared to net interest income of $3.1 million for the year ended December 31, 2005. This change was attributable primarily to our interest expense associated with the credit facilities agreement we entered into with Credit Suisse to fund a portion of the acquisition of WebCT. In addition, we recognized approximately $1.3 million in additional interest expense associated with the acceleration in the amortization of debt issuance costs due to the prepayments of debt principal during 2006 totaling $35.0 million. Further, this change was due in part to lower cash and cash equivalent and short-term investment balances during the year ended December 31, 2006 as compared to the year ended December 31, 2005 resulting from the use of cash for the acquisition of WebCT. Other expense. Our other expense for the year ended December 31, 2006 was $519,000 and pertains to the remeasurement of our foreign subsidiaries ledgers, which are maintained in the local foreign currency, into the United States dollar. In particular, this expense was primarily the result of the negative impact of the month-end change in the Canadian dollar exchange rate to the United States dollar from February 2006 to December 2006 on intercompany debt with our Canadian subsidiary. Income taxes. Our benefit for income taxes for the year ended December 31, 2006 was $4.6 million as compared to $14.3 million for the year ended December 31, 2005. The benefit for income taxes for the year ended December 31, 2006 was due to our loss for the period and includes $5.1 million in deferred income tax benefits, offset by $484,000 of current income tax expense, which primarily relates to state and international tax expense. As of December 31, 2006, we had net operating loss carryforwards for Federal and international income tax purposes of approximately $118.0 million. Approximately $79.4 million of this amount is restricted under Section 382 of the Internal Revenue Code. Section 382 of the Internal Revenue Code limits the utilization of net operating losses when ownership changes, as defined by that section, occur. We have performed an analysis of our Section 382 ownership changes and have determined that the utilization of certain of our net operating loss carryforwards may be limited. Utilization of the net operating loss carryforwards subject to Section 382 will be limited to approximately $8.1 million per year. Net operating loss carryforwards will expire, if unused, by the end of 2018-2026. Due to the length of time available to fully utilize the net operating loss carryforwards and the likelihood of having sufficient taxable income in those periods, we believe it is more likely than not that these assets will be realized. Net income (loss). As a result of the foregoing, we reported a net loss of $10.7 million for the year ended December 31, 2006 as compared to net income of $41.9 million for the year ended December 31, 2005.
35 Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Revenues. Our total revenues for the year ended December 31, 2005 were $135.7 million, representing an increase of $24.3 million, or 21.8%, as compared to total revenues of $111.4 million for the year ended December 31, 2004.
A detail of our total revenues by classification is as follows:
2004 2005 Product Professional Product Professional Revenues Services Revenues Total Revenues Services Revenues Total (In millions) (Unaudited) Recurring ratable revenues ...... $74.5 $ 0.2 $ 74.7 $ 95.7 $ 0.9 $ 96.6 Non-recurring ratable revenues . . 18.2 — 18.2 18.1 — 18.1 Other revenues .... 5.9 12.6 18.5 6.6 14.4 21.0 Total revenues . . . $98.6 $12.8 $111.4 $120.4 $15.3 $135.7
Product Revenues. The increase in recurring ratable revenues was primarily due to a $6.8 million increase in revenues from Blackboard Learning System licenses, a $4.3 million increase in hosting revenues, a $3.5 million increase in revenues from Blackboard Community System licenses, a $3.0 million increase in revenues from Blackboard Content System licenses, a $1.4 million increase in revenues from Blackboard Transaction System licenses and a $1.3 million increase in revenues from Blackboard Learning System-Basic Edition licenses and a $960,000 increase in revenues from enhanced support and maintenance revenues related to our software products. The increases in each of these categories were attributable to prior period sales to new and existing clients. As of December 31, 2005, we had a 2% increase in the number of clients as compared to December 31, 2004. Further, during 2005, our clients renewed or upgraded approximately 92% of the renewable license dollars eligible to be renewed during 2005, which was consistent with 2004. The increase in Blackboard Learning System license revenues was also attributable to the continued shift from the Blackboard Learning System — Basic Edition to the enterprise version of the Blackboard Learning System and the resulting higher average pricing and contractual value of these licenses.
The decrease in non-recurring ratable revenues was primarily due to a $1.0 million decrease in revenues from Blackboard Transaction System hardware products due to a decrease in current and prior period sales. This decrease was offset in part by a $400,000 increase in non-recurring hosting revenues, primarily set-up revenues, and a $420,000 increase in non-recurring publisher fees.
Of our total revenues, our international revenues for the year ended December 31, 2005 were $21.9 mil- lion, representing an increase of $5.1 million, or 30.3%, as compared to $16.8 million for the year ended December 31, 2004. International product revenues were $20.0 million, representing an increase of $5.1 mil- lion, or 33.9%, as compared to international product revenues of $14.9 million for the year ended December 31, 2004. The increase in international product revenues was driven primarily by an increase in recurring ratable revenues. This increase was primarily due to a $2.0 million increase in revenues from Blackboard Learning System licenses, a $1.3 million increase in revenues from Blackboard Community System licenses, a $960,000 increase in revenues from Blackboard Content System licenses, a $400,000 increase in revenues from Blackboard Learning System-Basic Edition licenses and a $270,000 increase in hosting revenues. The increases in each of these categories were attributable to prior period sales to new and existing clients. The increase in Blackboard Learning System revenues internationally was primarily attributable to the same factors that contributed to the increase in overall revenues for these products. The increase in international revenues also reflected our continued investment in increasing the size of our international sales force and international marketing efforts during 2005, which expanded our international presence and enabled us to sell more of our products to new and existing clients in our international markets.
36 Professional services revenues. Our professional services revenues for the year ended December 31, 2005 were $15.3 million, representing an increase of $2.5 million, or 19.6%, as compared to professional services revenues of $12.8 million for the year ended December 31, 2004. The increase in professional services revenues was primarily attributable to an increase in the number of enterprise licensees, which generally purchase greater volumes of our service offerings.
Cost of product revenues. Our cost of product revenues for the year ended December 31, 2005 was $29.6 million, representing an increase of $3.7 million, or 14.3%, compared to $25.9 million for the year ended December 31, 2004. The increase in costs of product revenues was primarily due to a $2.1 million increase in expenses for our hosting services due to the increase in number of clients contracting for our hosting services and the expansion of our hosting services facilities during 2005, a $1.2 million increase in sublicense costs primarily associated with the Blackboard Content System which was released in March 2004 and a $650,000 increase in our technical support group expenses. Cost of product revenues as a percentage of product revenues decreased to 24.6% for the year ended December 31, 2005 from 26.3% for the year ended December 31, 2004, due primarily to the decrease in Blackboard Transaction System hardware sales and shipments during the year ended December 31, 2005. Blackboard Transaction System hardware products generally have lower gross margins than our software products.
Cost of professional services revenues. Our cost of professional services revenues for the year ended December 31, 2005 was $10.2 million, representing an increase of $2.3 million, or 28.4%, compared to $8.0 million for the year ended December 31, 2004. The increase in cost of professional services revenues was directly related to the increase in professional services revenues. Cost of professional services revenues as a percentage of professional services revenues increased to 66.9% for the year ended December 31, 2005 from 62.3% for the year ended December 31, 2004. The increase in cost of professional services revenues was primarily due to a $1.9 increase in personnel-related costs due to an increase in staffing necessary to manage the increase in the number and size of service engagements throughout the year.
Research and development expenses. Our research and development expenses for the year ended Decem- ber 31, 2005 were $13.9 million, representing an increase of $196,000, or 1.4%, as compared to research and development expenses of $13.7 million for the year ended December 31, 2004. This increase was primarily attributable to a $500,000 increase in professional service expenses resulting from our continued efforts to increase the functionality of our products. This increase was offset in part by a $400,000 decrease in recruiting and relocation costs related to hiring efforts during 2004 in our research and development department.
Sales and marketing expenses. Our sales and marketing expenses for the year ended December 31, 2005 were $37.9 million, representing an increase of $2.7 million, or 7.7%, as compared to sales and marketing expenses of $35.2 million for the year ended December 31, 2004. This increase was primarily attributable to a $3.2 million increase in personnel-related expenses due to an increase in headcount and higher average salaries due to annual salary increases during 2005 and a $675,000 increase in general marketing activities. These increases were offset in part by a $1.4 million decrease in bad debt expense for the year ended December 31, 2005 as compared to the year ended December 31, 2004. This decrease is associated with the continued improvement in collections on accounts receivables over prior periods and the reinstatement and subsequent collections on accounts receivable that were deemed uncollectible in prior periods.
General and administrative expenses. Our general and administrative expenses for the year ended December 31, 2005 were $19.3 million, representing an increase of $4.2 million, or 28.1%, from $15.1 million for the year ended December 31, 2004. This increase was primarily attributable to a $1.5 million increase in employee compensation costs related to full year costs for new senior management hires in 2004, increased headcount related to new hires during 2005 and higher average salaries across all general and administrative functional departments due to annual salary increases in 2005. General and administrative expenses also increased due a $1.4 million increase in professional service costs associated with costs of being a public company, including increased expenses related to Sarbanes-Oxley compliance activities, a $520,000 increase in insurance costs due to higher liability coverage costs associated with being a public company and a $625,000 increase in costs related to an increase in the office space in our Washington, D.C. headquarters, including rent, utilities, repairs and maintenance expenses.
37 Net interest income. Our net interest income for the year ended December 31, 2005 was $3.1 million, representing an increase of $2.8 million from $315,000 for the year ended December 31, 2004. The increase in net interest income was attributable primarily to higher cash and short-term investment balances for the year ended December 31, 2005 as compared to the year ended December 31, 2004 resulting from the receipt of proceeds from our IPO in June 2004, cash generated from operations from current and prior periods and the repayment of outstanding debt during current and prior periods. Income taxes. Our benefit for income taxes for the year ended December 31, 2005 was $14.3 million compared to a provision for income taxes of $299,000 for the year ended December 31, 2004. For the first time in our history, we had generated cumulative earnings from operations for the three-year period ended December 31, 2005. As a result of this positive earnings trend and projected operating results in the foreseeable future, we determined that it was more likely than not that we would be able to generate sufficient taxable income to utilize our net operating loss carryforwards, and accordingly, reduced our deferred tax asset valuation allowance by approximately $31.6 million. This reduction resulted in the recognition of an income tax benefit totaling $14.8 million. Of the total income tax benefit recognized, approximately $12.2 million related to a Federal deferred tax benefit with the remainder representing a state deferred tax benefit. We do not have an established history of earnings related to our international net operating loss carryforwards, primarily resulting from our operations in The Netherlands, and therefore $2.4 million in international net operating loss carryforwards continue to be fully reserved through a valuation allowance as of December 31, 2005. Although we will continue to have significant net operating loss carryforwards which are expected to mitigate some of our cash tax expenditures over the next several years, we began recording, in 2006, a provision for income taxes based on the appropriate effective tax rate. Deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting bases and the tax bases of assets and liabilities. Deferred tax assets are also recognized for certain tax net operating loss carryforwards. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized. The realization of deferred tax assets is dependent upon the generation of future taxable income. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized. As of December 31, 2005, we had net operating loss carryforwards for Federal income tax purposes of approximately $40.0 million. Approximately $3.0 million of this amount is restricted under Section 382 of the Internal Revenue Code. Section 382 of the Internal Revenue Code limits the utilization of net operating losses when ownership changes, as defined by that section, occur. We have performed an analysis of our Section 382 ownership changes and determined that the utilization of some of our net operating loss carryforwards may be limited. This limitation will defer the utilization of approximately $3.0 million of our net operating loss carryforwards, which will be limited to approximately $200,000 per year and will expire, if unused, by the end of 2019. We believe we will have sufficient taxable income in those periods to utilize the available net operating loss carryforwards, and therefore we believe it is more likely than not that these assets will be realized. Net Income. As a result of the foregoing, our net income for the year ended December 31, 2005 was $41.9 million, representing an increase of $31.8 million or 316.5% from $10.0 million for the year ended December 31, 2004.
Quarterly Results Our quarterly operating results and operating cash flows normally fluctuate as a result of seasonal variations in our business, principally due to the timing of client budget cycles and student attendance at client facilities. Historically, we have had lower new sales in our first and fourth quarters than in the remainder of the year. Our expenses, however, do not vary significantly with these changes and, as a result, such expenses do not fluctuate significantly on a quarterly basis. Historically, we have performed a disproportionate amount of our professional services, which are recognized as incurred, in our second and third quarters each year. We expect quarterly fluctuations in operating results and operating cash flows to continue as a result of the uneven seasonal demand for our licenses and services offerings.
38 The following table sets forth selected statements of operations and cash flow data for each of the quarters in the years ended December 31, 2005 and 2006. Quarter Ended March 31, June 30, September 30, December 31, 2005 2005 2005 2005 (In thousands) Total revenues ...... $30,942 $33,049 $35,927 $35,746 Total operating expenses ...... 25,803 27,291 29,318 28,805 Income from operations ...... 5,139 5,758 6,609 6,941 Net income(1) ...... 5,410 6,063 7,269 23,111 Net cash (used in) provided by operating activities ...... (1,421) 2,506 22,281 16,447
Quarter Ended March 31, June 30, September 30, December 31, 2006 2006 2006 2006 (In thousands) Total revenues ...... $37,708 $43,580 $50,354 $51,421 Total operating expenses(2) ...... 37,827 51,856 55,455 49,751 (Loss) Income from operations...... (119) (8,276) (5,101) 1,670 Net income (loss) ...... 148 (6,311) (4,775) 201 Net cash (used in) provided by operating activities ...... (10,023) (3,848) 24,455 12,302 (1) For the first time in our history, we had generated cumulative earnings from operations for the three-year period ended December 31, 2005. As a result of this positive earnings trend and projected operating results in the foreseeable future, we determined that it was more likely than not that we would be able to generate sufficient taxable income to utilize our net operating loss carryforwards, and accordingly, reduced our deferred tax asset valuation allowance by approximately $31.6 million. This reduction resulted in the recognition of an income tax benefit of $14.8 million for the quarter ended December 31, 2005. (2) During the three months ended December 31, 2006, we adjusted our estimated forfeiture rate from approximately 10.0% to approximately 15.0% which resulted in a reduction of previously recorded compensation expense of approximately $475,000.
Liquidity and Capital Resources
Our cash and cash equivalents were $30.8 million at December 31, 2006 compared to $75.9 million at December 31, 2005. The decrease in cash and cash equivalents was primarily due to the use of cash for the acquisition of WebCT. Net cash provided by operating activities was $22.9 million during the year ended December 31, 2006 as compared to $39.8 million during the year ended December 31, 2005. This change for the year ended December 31, 2006 compared to the year ended December 31, 2005 was primarily due to a net loss of $10.7 million for the year ended December 31, 2006 as compared to net income of $41.9 million for the year ended December 31, 2005 which was primarily due to post-acquisition merger related expenses including severance and integration costs resulting from the acquisition of WebCT. Accounts receivable increased $21.8 million during the year ended December 31, 2006, net of accounts receivable assumed in the acquisition of WebCT of $4.4 million, due to an increase in invoicing associated with increased sales to new and existing clients during 2006 as compared to 2005. These decreases were offset, in part, by an increase in deferred revenues primarily associated with the higher volume of new sales to new and existing clients and the higher level of renewing licenses during the year ended December 31, 2006 as compared to the fourth quarter of 2005, offset by the recognition of revenues from prior period sales. Amortization of intangibles also increased as a result of our acquisition of WebCT.
39 Net cash used in investing activities was $102.4 million during the year ended December 31, 2006 as compared to $53.1 million during the year ended December 31, 2005. This increase in cash usage was primarily due to the $154.6 million in net cash paid related to the acquisition of WebCT. This increase was offset by the sale of $62.6 million in short-term investments to fund a portion of the acquisition of WebCT. Cash expenditures for purchase of property and equipment were $10.1 million for the year ended December 31, 2006, which represents approximately 5.5% of total revenues for the year ended December 31, 2006. We expect cash expenditures for purchases of property and equipment to be approximately 8% of revenues during the year ended December 31, 2007 due to the one-time costs related to the re-location of our corporate headquarters and expect these expenditures to return to the 6% to 7% range in future periods.
Net cash provided by financing activities was $34.4 million during the year ended December 31, 2006 as compared to $11.0 million during the year ended December 31, 2005. This change was primarily due to the $67.5 million in proceeds, net of $2.5 million in debt issuance costs, associated with the credit facilities agreement we entered into with Credit Suisse to fund a portion of the acquisition of WebCT. During the year ended December 31, 2006, we repaid the $10.0 million revolving credit facility and $35.6 million of the term loan facility. We also received $9.2 million in proceeds from exercise of stock options as compared to $11.8 million for the year ended December 31, 2005.
In connection with the acquisition of WebCT, we paid a portion of the purchase price using borrowings under a $70.0 million senior secured credit facilities agreement with Credit Suisse. The agreement provided for a $60.0 million senior secured term loan facility repayable over six years and a $10.0 million senior secured revolving credit facility due and payable in full at the end of five years. The interest rate on the facilities will accrue at one of the following rates selected by us: (a) adjusted LIBOR plus 2.25% or (b) an alternate base rate plus 1.25%. The alternate base rate is the higher of Credit Suisse’s prime rate and the federal funds effective rate plus 0.5%. If we choose the adjusted LIBOR interest rate option, interest payments would be due on the last day of the interest period (one, two, three or six months) as selected by us. If we choose the alternate base rate interest rate option, interest payments would be due on the last day of each calendar quarter. During March 2006, we chose the alternate base rate interest rate option. As of March 31, 2006, we changed to the adjusted LIBOR interest rate option. At December 31, 2006 the interest rate on the term loan facility was 7.57%. This interest rate does not reflect the impact of the amortization of debt issuance costs, discussed below, as interest expense.
We repaid $10.0 million on the revolving credit facility on March 28, 2006. As of December 31, 2006, no amounts were outstanding on the revolving credit facility and $10.0 million in borrowings were available. We are required to pay a commitment fee, due at the end of each calendar quarter until the maturity date, equal to 0.5% on the average daily unused portion of the revolving credit facility as defined in the senior secured credit facilities agreement. We record this fee in interest expense.
The senior secured credit facilities agreement allows for voluntary principal prepayments of principal and requires mandatory principal prepayments within 90 days after calendar year-end based on a calculation of excess cash flow as defined in the senior secured credit facilities agreement. We do not expect any mandatory principal prepayments within 90 days after year-end based on the calculation of excess cash flow as defined in the senior secured credit facilities agreement. We made scheduled principal payments on the term loan facility of $150,000 which were due on the last day of each quarter from March 31, 2006 through December 31, 2006. A principal payment in the amount of $62,000 is due on the last day of each quarter from March 31, 2007 through December 31, 2010 with a $1.7 million principal payment each due on March 31, 2011 and June 30, 2011 and a $19.9 million payment due on September 30, 2011. We prepaid $10.0 million during each of August and December, 2006 and prepaid $5.0 million during each of September, October and November, 2006. As of December 31, 2006, we had $24.4 million outstanding on the term loan facility.
In connection with obtaining the senior secured credit facilities, we incurred $2.5 million in debt issuance costs. These costs, which are recorded as a debt discount, are netted against the remaining principal amount outstanding. The debt discount is being amortized as interest expense using the effective interest method over the term of the senior secured credit facilities and such amortization has been adjusted for any prepayments on the term loan facility. During the year ended December 31, 2006, we recognized approximately $1.2 million in
40 additional interest expense associated with the acceleration in the amortization of the debt discount due to the prepayments of debt principal during 2006 totaling $35.0 million. During the year ended December 31, 2006, we recorded approximately $1.7 million of amortization of the debt discount as interest expense.
Under the terms of the senior secured credit facilities agreement, the credit facilities are guaranteed by all of our domestic subsidiaries and secured by perfected first priority security interests in, and mortgages on, substantially all of our tangible and intangible assets (including the capital stock of each specified subsidiary) and each of our subsidiaries. In addition, the facilities contain customary negative covenants applicable to us and our subsidiaries with respect to our operations and financial condition, such as a maximum quarterly capital expenditure amount, a maximum interest coverage ratio and a minimum leverage ratio.
We believe that our existing cash and cash equivalents, available borrowings and future cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs over the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the timing and extent of spending to support product development efforts and expansion into new territories, the timing of introductions of new products or services, the timing of enhancements to existing products and services and the timing of capital expenditures. Also, we may make investments in, or acquisitions of, complementary businesses, services or technologies, which could also require us to seek additional equity or debt financing. To the extent that available funds are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements with unconsolidated entities or related parties and accordingly, there are no off-balance sheet risks to our liquidity and capital resources from unconsolidated entities.
Obligations and Commitments
As of December 31, 2006, minimum future payments under existing credit facilities and noncancelable operating leases and rental income from subleases are as follows for the years below: Credit Operating Sub-Lease Facilities Leases Income (In thousands) 2007 ...... $ 246 $ 4,312 $230 2008 ...... 246 5,057 — 2009 ...... 246 5,133 — 2010 ...... 246 5,510 — 2011 ...... 23,416 5,525 — 2012 and beyond ...... — 35,409 — Total ...... $24,400 $60,946 $230
On December 15, 2006, we entered into an agreement with Washington Television Center, LLC pursuant to which we will lease approximately 111,895 square feet of office space in the building known as 650 Massachusetts Avenue, Washington, D.C. We will be relocating our corporate headquarters to the leased premises. The lease term commences on the later of (i) eight months from the date on which the landlord delivers the leased premises to us and (ii) the date on which we occupy the leased premises. The delivery date of the leased premises is anticipated to be June 2007, and we anticipate that we will occupy the leased premises in late 2007 or early 2008.
The base annual rent will initially be $45.75 per rentable square foot and will increase on each anniversary by 2%, except on the fifth anniversary on which it will increase by $1.50 per square foot. The rent
41 for the first four months of the first lease year and the first two months of the second lease year will be abated.
Seasonality Our operating results and operating cash flows normally fluctuate as a result of seasonal variations in our business, principally due to the timing of client budget cycles and student attendance at client facilities. Historically, we have had lower new sales in our first and fourth quarters than in the remainder of the year. Our expenses, however, do not vary significantly with these changes and, as a result, such expenses do not fluctuate significantly on a quarterly basis. Historically, we have performed a disproportionate amount of our professional services, which are recognized as incurred, in our second and third quarters each year. In addition, deferred revenues can vary on a seasonal basis for the same reasons. We expect quarterly fluctuations in operating results and operating cash flows to continue as a result of the uneven seasonal demand for our licenses and services offerings. Historically, we have generated more of our operating cash flow in the second half of the calendar year. This pattern may change, however, as a result of acquisitions, new market opportunities or new product introductions.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk Our principal exposure to market risk relates to changes in interest rates. At December 31, 2006, $24.4 million was outstanding on our term loan facility with Credit Suisse, subject to covenants and restrictions. The interest rate on the term loan facility accrues at one of the following rates selected by us: (a) adjusted LIBOR plus 2.25% or (b) an alternate base rate plus 1.25%. The alternate base rate is the higher of Credit Suisse’s prime rate and the federal funds effective rate plus 0.5%. At December 31, 2006, the interest rate on the term loan facility was 7.57%. Interest rate changes would result in increases or decreases in the fair value of our debt due to differences between market interest rates and rates in effect at the inception of our debt obligation. For the year ended December 31, 2006, a one percentage point increase in interest rates would have increased our interest expense by approximately $450,000. Interest income on our cash and cash equivalents is subject to interest rate fluctuations. For the year ended December 31, 2006, a one percentage point decrease in interest rates would have reduced our interest income by approximately $450,000. We have accounts on our foreign subsidiaries ledgers which are maintained in the local foreign currency and remeasured into the United States dollar. As a result, we are exposed to movements in the exchange rates of various currencies against the United States dollar and against the currencies of other countries in which we sell products and services. In particular, we have accounts recorded in the Canadian dollar. Therefore, when the Canadian dollar strengthens or weakens against the United States dollar, net income (loss) is increased or decreased, respectively. As a result, other expense of $519,000 was recorded during the year ended December 31, 2006. For the year ended December 31, 2006, an one percentage point adverse change in the exchange rate of the Canadian dollar into the United States dollar as of December 31, 2006 would have increased our other expense by approximately $150,000.
42 Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Report of Independent Registered Public Accounting Firm 44 Consolidated Balance Sheets as of December 31, 2005 and 2006 45 Consolidated Statements of Operations for the years ended December 31, 2004, 2005 and 2006 46 Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended December 31, 2004, 2005 and 2006 47 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006 48 Notes to Consolidated Financial Statements 49
43 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders Blackboard Inc. We have audited the accompanying consolidated balance sheets of Blackboard Inc. as of December 31, 2005 and 2006, and the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Blackboard Inc. at December 31, 2005 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Blackboard Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 20, 2007 expressed an unqualified opinion thereon. As discussed in Note 2 to the consolidated financial statements, in 2006, the Company changed its method of accounting for stock-based compensation plans in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”.
/s/ Ernst & Young LLP
McLean, VA February 20, 2007
44 BLACKBOARD INC. CONSOLIDATED BALANCE SHEETS
December 31, 2005 2006 (In thousands) Current assets: Cash and cash equivalents...... $ 75,895 $ 30,776 Short-term investments ...... 62,602 — Accounts receivable, net of allowance for doubtful accounts of $701 and $767 at December 31, 2005 and 2006, respectively...... 26,136 52,394 Inventories ...... 1,806 2,377 Prepaid expenses and other current assets ...... 2,116 3,514 Deferred tax asset, current portion...... 10,274 7,326 Deferred cost of revenues, current portion ...... 5,797 7,983 Total current assets ...... 184,626 104,370 Deferred tax asset, noncurrent portion ...... 12,023 25,431 Deferred cost of revenues, noncurrent portion ...... 1,310 4,253 Deferred merger costs (WebCT, Inc.) ...... 4,956 — Restricted cash ...... 521 1,999 Property and equipment, net ...... 9,940 12,761 Goodwill ...... 10,252 101,644 Intangible assets, net ...... 560 56,841 Total assets ...... $224,188 $307,299 Current liabilities: Accounts payable ...... $ 1,833 $ 2,238 Accrued expenses ...... 14,083 20,519 Term loan, current portion ...... — 246 Deferred rent, current portion ...... 347 371 Deferred revenues, current portion...... 74,975 117,972 Total current liabilities ...... 91,238 141,346 Term loan, noncurrent portion, net of debt discount of $777 at December 31, 2006 . . . — 23,377 Deferred rent, noncurrent portion ...... 426 157 Deferred revenues, noncurrent portion ...... 2,199 2,298 Commitments and contingencies Preferred stock, $0.01 par value; 5,000,000 shares authorized, and no shares issued or outstanding at December 31, 2005 and 2006 ...... — — Common stock, $0.01 par value; 200,000,000 shares authorized; 27,479,351 and 28,248,214 shares issued and outstanding at December 31, 2005 and 2006, respectively ...... 275 282 Additional paid-in capital ...... 210,919 231,331 Deferred stock compensation ...... (114) — Accumulated deficit ...... (80,755) (91,492) Total stockholders’ equity...... 130,325 140,121 Total liabilities and stockholders’ equity ...... $224,188 $307,299
See accompanying notes.
45 BLACKBOARD INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 2004 2005 2006 (In thousands, except share and per share data) Revenues: Product ...... $ 98,632 $ 120,389 $ 160,392 Professional services ...... 12,771 15,275 22,671 Total revenues...... 111,403 135,664 183,063 Operating expenses: Cost of product revenues, excludes $1,567, $0 and $9,333 in amortization of acquired technology included in amortization of intangibles resulting from acquisitions shown below for the years ended December 31, 2004, 2005 and 2006, respectively(1) ...... 25,897 29,607 39,594 Cost of professional services revenues(1) ...... 7,962 10,220 16,001 Research and development(1)...... 13,749 13,945 27,162 Sales and marketing(1) ...... 35,176 37,873 58,340 General and administrative(1) ...... 15,069 19,306 35,823 Amortization of intangibles resulting from acquisitions ...... 3,517 266 17,969 Total operating expenses ...... 101,370 111,217 194,889 Income (loss) from operations ...... 10,033 24,447 (11,826) Other income (expense), net: Interest expense...... (179) (49) (5,354) Interest income ...... 494 3,146 2,380 Other expense ...... — — (519) Income (loss) before (provision) benefit for income taxes ...... 10,348 27,544 (15,319) (Provision) benefit for income taxes...... (299) 14,309 4,582 Net income (loss) ...... 10,049 41,853 (10,737) Dividends on and accretion of convertible preferred stock ..... (6,344) — — Net income (loss) attributable to common stockholders ...... $ 3,705 $ 41,853 $ (10,737) Net income (loss) per common share: Basic ...... $ 0.23 $ 1.57 $ (0.39) Diluted ...... $ 0.21 $ 1.47 $ (0.39) Weighted average number of common shares: Basic ...... 16,071,598 26,714,748 27,857,576 Diluted ...... 17,864,137 28,509,777 27,857,576
(1) Includes the following amounts related to stock-based compensation: Cost of product revenues ...... $ — $ — $ 386 Cost of professional services revenues ...... — — 524 Research and development ...... — — 733 Sales and marketing ...... — — 2,951 General and administrative...... 174 75 3,462
See accompanying notes.
46 BLACKBOARD INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
Additional Deferred Total Common Stock Paid-In Stock Accumulated Stockholders’ Shares Amount Capital Compensation Deficit (Deficit) Equity (In thousands, except share amounts) Balance at December 31, 2003 ...... 5,536,396 $ 55 $ 8,020 $ (35) $(132,657) $(124,617) Issuance of common stock upon exercise of options...... 397,033 4 1,966 — — 1,970 Issuance of common stock upon exercise of warrants ...... 156,171 2 246 — — 248 Issuance of common stock in connection with acquisition of Prometheus ...... 27,447 — — — — — Issuance of compensatory stock options . . . — — 348 (279) — 69 Amortization of deferred stock compensation ...... — — — 105 — 105 Accretion of beneficial conversion feature associated with Series E Preferred Shares and warrants ...... — — (1,775) — — (1,775) Accretion on preferred stock and related dividends ...... — — (4,569) — — (4,569) Issuance of common stock pursuant to accrued dividends on convertible preferred stock ...... 2,414,857 24 — — — 24 Issuance of common stock pursuant to conversion of convertible preferred stock ...... 13,371,980 134 136,483 — — 136,617 Issuance of common stock pursuant to initial public offering, net of expenses . . . 4,073,938 41 50,945 — — 50,986 Net income ...... — — — — 10,049 10,049 Balance at December 31, 2004 ...... 25,977,822 260 191,664 (209) (122,608) 69,107 Issuance of common stock upon exercise of options...... 1,320,728 13 11,779 — — 11,792 Issuance of common stock upon cashless exercise of warrants...... 180,801 2 (2) — — — Amortization of deferred stock compensation ...... — — (20) 95 — 75 Tax benefit for exercise of disqualified stock options ...... — — 7,498 — — 7,498 Net income ...... — — — — 41,853 41,853 Balance at December 31, 2005 ...... 27,479,351 275 210,919 (114) (80,755) 130,325 Issuance of common stock upon exercise of options...... 768,863 7 9,153 — — 9,160 Reclassification of deferred stock compensation upon adoption of SFAS 123R ...... — — (114) 114 — — Tax benefit for exercise of disqualified stock options ...... — — 3,317 — — 3,317 Stock-based compensation expense ...... — — 8,056 — — 8,056 Net loss ...... — — — — (10,737) (10,737) Balance at December 31, 2006 ...... 28,248,214 $282 $231,331 $ — $ (91,492) $ 140,121
See accompanying notes.
47 BLACKBOARD INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2004 2005 2006 (In thousands) Cash flows from operating activities Net income (loss) ...... $ 10,049 $ 41,853 $ (10,737) Adjustments to reconcile net income (loss) to net cash provided by operating activities Deferred tax benefit ...... — (14,799) (5,075) Excess tax benefits from stock-based compensation ...... — — (3,317) Amortization of debt discount ...... — — 1,701 Depreciation and amortization ...... 6,275 6,867 8,980 Amortization of intangibles resulting from acquisitions...... 3,517 266 17,969 Change in allowance for doubtful accounts ...... (64) (253) (109) Noncash deferred stock compensation ...... 174 75 8,056 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable ...... 1,248 (4,197) (21,780) Inventories...... 56 188 (571) Prepaid expenses and other current assets ...... (173) (910) (42) Deferred cost of revenues ...... (1,070) (2,191) (5,129) Accounts payable ...... (719) 719 133 Accrued expenses ...... (610) 2,373 (5,588) Deferred rent ...... (68) (294) (245) Deferred revenues...... 14,116 10,116 38,640 Net cash provided by operating activities ...... 32,731 39,813 22,886 Cash flows from investing activities Purchase of property and equipment ...... (7,440) (7,959) (10,081) Payments for patent enforcement costs...... — — (276) Purchase of held-to-maturity securities ...... — (33,296) — Sale of held-to-maturity securities ...... — 9,750 23,546 Purchase of available-for-sale securities ...... (20,000) (55,306) — Sale of available-for-sale securities ...... — 36,250 39,056 Payments for merger costs (WebCT, Inc.)...... — (2,536) — Acquisition of WebCT, Inc., net of cash acquired ...... — — (154,628) Net cash used in investing activities ...... (27,440) (53,097) (102,383) Cash flows from financing activities Proceeds from revolving credit facility ...... — — 10,000 Payments on revolving credit facility ...... — — (10,000) Proceeds from term loan ...... — — 57,522 Payments on term loan...... — — (35,600) Payments on equipment notes ...... (922) (762) — Proceeds from line of credit ...... 7,880 — — Payments on line of credit ...... (15,760) — — Payments on note payable ...... (2,000) — — Proceeds from issuance of common stock pursuant to initial public offering, net of expenses ...... 50,986 — — Releases of letters of credit ...... — — 1,777 Payments on letters of credit...... — — (1,798) Proceeds from issuance of common stock pursuant to exercise of warrants...... 248 — — Excess tax benefits from stock-based compensation ...... — — 3,317 Proceeds from exercise of stock options ...... 1,970 11,792 9,160 Net cash provided by financing activities ...... 42,402 11,030 34,378 Net increase (decrease) in cash and cash equivalents ...... 47,693 (2,254) (45,119) Cash and cash equivalents at beginning of year ...... 30,456 78,149 75,895 Cash and cash equivalents at end of year ...... $ 78,149 $ 75,895 $ 30,776 Supplemental cash flow information Cash paid for interest...... $ 179 $ 49 $ 3,539 Cash paid for income taxes...... 607 687 344 Accretion on preferred stock and related dividends ...... 6,344 — — See accompanying notes.
48 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and 2006
1. Nature of Business and Organization Blackboard Inc. (the Company) is a leading provider of enterprise software applications and related services to the education industry. The Company’s suites of products include the following products: Blackboard Learning SystemTM, Blackboard Community SystemTM, Blackboard Content SystemTM, Blackboard Outcomes SystemTM, Blackboard Portfolio SystemTM Blackboard Transaction SystemTM and Blackboard OneTM. The Company began operations in 1997 as a limited liability company in Delaware. In 1998, the Company was incorporated in Delaware, merged with the limited liability corporation and is now a C corporation for tax purposes. On February 28, 2006, the Company completed its merger with WebCT, Inc. (WebCT) pursuant to the Agreement and Plan of Merger dated as of October 12, 2005.
2. Significant Accounting Policies Basis of Presentation and Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and accounts have been eliminated in consolidation. The Company consolidates investments where it has a controlling financial interest as defined by Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements,” as amended by Statement of Financial Accounting Standards (SFAS) No. 94, “Consolidation of all Majority-Owned Subsidiaries.” The usual condition for controlling financial interest is ownership of a majority of the voting interest and, therefore, as a general rule ownership, directly or indirectly, of more than fifty percent of the outstanding voting shares is a condition pointing towards consolidation. For investments in variable interest entities, as defined by Financial Statement Accounting Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities,” the Company would consolidate when it is determined to be the primary beneficiary of a variable interest entity. For those investments in entities where the Company has significant influence over operations, but where the Company neither has a controlling financial interest nor is the primary beneficiary of a variable interest entity, the Company follows the equity method of accounting pursuant to Accounting Principles Bulletin (APB) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”
Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation.
Fair Value of Financial Instruments SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Due to their short-term nature, the carrying amounts reported in the
49 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) consolidated financial statements approximate the fair value for cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses. The fair value of the Company’s long-term debt is based upon quoted market prices for the same and similar issuances giving consideration to quality, interest rates, maturity and other characteristics. As of December 31, 2006, the Company believes the carrying amount of its long-term debt approximates its fair value since the variable interest rate of the debt approximates a market rate.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments, which are readily convertible into cash and have original maturities of three months or less.
Short-term Investments
All investments with original maturities of greater than 90 days are accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company determines the appropriate classification at the time of purchase and reevaluates such designation as of each balance sheet date. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity under the effective interest method. Such amortization is recorded as interest income. Interest on held-to-maturity securities is recorded as interest income. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses, if any, reported in other comprehensive income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are recorded as other income (expense) in the consolidated statements of operations.
At December 31, 2005, the Company held $62.6 million in short-term investments which consisted of $23.5 million in government agency bonds, which are classified as held-to-maturity and $39.1 million in auction rate securities, which are classified as available-for-sale. The Company’s investments in these auction rate securities are recorded at cost which approximates market due to their variable interest rates which reset approximately every 30 days. As such, the underlying maturities of these investments as of December 31, 2005 range from approximately 20 to 38 years. Despite the long-term nature of their stated contractual maturities, there is a readily liquid market for these securities and, therefore, these securities have been classified as short-term. During the year ended December 31, 2006, the balance of the short-term investments were liquidated to fund a portion of the acquisition of WebCT.
Restricted Cash
As of December 31, 2005 and 2006, $521,000 and $2.0 million, respectively, of cash was pledged as collateral on outstanding letters of credit related to office space lease obligations. Generally, the restrictions lapse at the termination of the lease obligations.
Foreign Currency Translation
The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. The Company remeasures the monetary assets and liabilities of its foreign subsidiaries, which are maintained in the local currency ledgers, at the rates of exchange in effect at month end. Revenues and expenses recorded in the local currency during the period are translated using average exchange rates for each month. Non-monetary assets and liabilities are translated using historical rates. Resulting adjustments from the remeasurement process are included in other income (expense) in the accompanying consolidated statements of operations.
50 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. The Company deposits its cash with financial institutions that the Company considers to be of high credit quality. With respect to accounts receivable, the Company performs ongoing evaluations of its customers, generally grants uncollateralized credit terms to its customers, and maintains an allowance for doubtful accounts based on historical experience and management’s expectations of future losses. As of and for the years ended December 31, 2005 and 2006, there were no significant concentrations with respect to the Company’s consolidated revenues or accounts receivable. The Company recognized revenue for products and professional services provided to an investor of $3.9 million for the year ended December 31, 2004. This investor did not hold any of the Company’s stock during 2005 or 2006.
Deferred Income Taxes Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting bases and the tax bases of assets and liabilities. Deferred tax assets are also recognized for tax net operating loss carryforwards. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized. The realization of total deferred tax assets is contingent upon the generation of future taxable income. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.
Inventories Inventories are stated at the lower of cost or market using the first-in, first-out method.
Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are calculated on the straight- line method over the following estimated useful lives of the assets: Computer and office equipment ...... 3years Software ...... 2years Furniture and fixtures ...... 3to5years Leasehold improvements...... Shorter of lease term or useful life
Goodwill and Intangible Assets The impairment of goodwill is assessed in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Accordingly, the Company tests goodwill for impairment annually on October 1, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its fair value to its carrying value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. If it is determined that an impairment has occurred, the Company records a write-down of the carrying value and charges the impairment as an operating expense in the period the determination is made. Although the Company believes goodwill is appropriately stated in its consolidated financial statements, changes in strategy or market conditions could significantly impact these judgments and require an adjustment to the recorded balance.
51 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The costs of defending and protecting patents are capitalized. All costs incurred to the point when a patent application is to be filed are expensed as incurred.
Intangible assets are amortized using the straight-line method over the following estimated useful lives of the assets: Acquired technology ...... 3years Contracts and customer lists...... 3to5years Non-compete agreements ...... Termofagreement Trademarks and domain names ...... 3years Patents and related costs ...... Life of patent
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of any asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the future discounted cash flows compared to the carrying amount of the asset.
Revenue Recognition and Deferred Revenue
The Company’s revenues are derived from two sources: product sales and professional services sales. Product revenues include software license, hardware, premium support and maintenance, and hosting revenues. Professional services revenues include training and consulting services. Revenue from software licenses and maintenance is recorded in accordance with the American Institute of Certified Public Accountants’ Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as modified by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.” The Company’s software does not require significant modification and customization services. Where services are not essential to the functionality of the software, the Company begins to recognize software licensing revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed and determinable; and (4) collectibility is probable. The Company does not have vendor-specific objective evidence, or VSOE, of fair value for support and maintenance separate from software. Accordingly, when licenses are sold in conjunction with the Company’s support and maintenance, license revenue is recognized over the term of the maintenance service period.
The Company’s hardware revenue is derived from two types of transactions: sales of hardware in conjunction with the Company’s software licenses, which are referred to as bundled hardware-software systems, and sales of hardware without software, which generally involve the resale of third-party hardware. After any necessary installation services are performed, hardware revenues are recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed and determinable; and (4) collectibility is probable. VSOE of the fair value for the separate components of bundled hardware-software systems has not been determined. Accordingly, when a bundled hardware-software system is sold, all revenue is recognized over the term of the maintenance service period. Hardware sales without software are recognized upon delivery of the hardware to the Company’s client.
Hosting revenues are recorded in accordance with Emerging Issues Task Force, or EITF, 00-3, “Applica- tion of AICPA SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware.” Hosting fees and set-up fees are recognized ratably over the term of the hosting agreement.
52 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Professional services revenues, which are generally contracted on a time-and-materials basis and consist of training, implementation and installation services, are recognized as the services are provided. The Company does not offer specified upgrades or incrementally significant discounts. Advance payments are recorded as deferred revenues until the product is shipped, services are delivered or obligations are met and the revenue can be recognized. Deferred revenues represent the excess of amounts invoiced over amounts recognized as revenues. Non-specified upgrades of the Company’s product are provided only on a when-and-if-available basis. Any contingencies, such as rights of return, conditions of acceptance, warranties and price protection, are accounted for under SOP 97-2. The effect of accounting for these contingencies included in revenue arrangements has not been material.
Cost of Revenues and Deferred Cost of Revenues Cost of revenues include all direct materials, direct labor, and those indirect costs related to revenue such as indirect labor, materials and supplies, equipment rent, and amortization of software developed internally and software license rights. Cost of product revenues excludes amortization of acquired technology intangibles resulting from acquisitions, which is included as amortization of intangibles acquired in acquisitions. Amortization expense related to acquired technology for the years ended December 31, 2004 and 2006 was $1.6 million and $9.3 million, respectively. There was no amortization expense related to acquired technology for the year ended December 31, 2005. The Company does not have transactions in which the deferred costs of revenues exceed deferred revenues. Deferred cost of revenues represent the cost of hardware (if sold as part of a complete system) and software that is purchased and has been sold in conjunction with the Company’s products. These costs are recognized as costs of revenues proportionally and over the same period that deferred revenue is recognized as revenues in accordance with SAB Topic 13.
Software Development Costs The Company accounts for software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized to the extent that the capitalizable costs do not exceed the realizable value of such costs, until the product is available for general release to customers. The Company defines the establishment of technological feasibility as the completion of all planning, designing, coding and testing activities that are necessary to establish products that meet design specifications including functions, features and technical performance requirements. Under the Company’s definition, establishing technological feasibility is considered complete only after the majority of client testing and feedback has been incorporated into product functionality. As of December 31, 2005 and 2006, the Company has capitalized software of $2.4 million and $2.7 million, respectively, which is amortized over two years. The Company amortized $457,000, $386,000 and $592,000 for the years ended December 31, 2004, 2005 and 2006, respectively. Capitalized software is included in property and equipment in the accompanying consolidated balance sheets.
Advertising The Company expenses advertising as incurred. Advertising expense was $338,000, $834,000 and $1.2 million for the years ended December 31, 2004, 2005 and 2006, respectively.
Accounting for Stock-Based Compensation Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for
53 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Issued to Employees” (APB No. 25), and related interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2005), “Share-Based Payment” (SFAS 123R), using the modified prospective transition method. Under the modified prospective transition method, compen- sation cost recognized in fiscal 2006 includes: (a) compensation cost for all equity-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation cost for all equity-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Results for prior periods have not been restated. As a result of adopting SFAS 123R on January 1, 2006, the Company’s loss before benefit for income taxes and net loss for the year ended December 31, 2006 were approximately $8.1 million and $5.7 million more, respectively, than if the Company had continued to account for stock-based compensation under APB No. 25. Basic and diluted net loss per common share for the year ended December 31, 2006 were each approximately $0.20 more than if the Company had not adopted SFAS 123R. Upon adoption of FAS 123R the remaining balance of deferred compensation was reclassified to addition paid-in capital on the consolidated balance sheets. The following table illustrates the effect on net income (loss) and net income (loss) per common share if the Company had applied the fair value recognition provisions of SFAS 123R to stock-based compensation for the years ended December 31, 2004 and 2005. The reported and pro forma net income (loss) and net income (loss) per common share for the year ended December 31, 2006 are the same because stock-based compensation is calculated under the provisions of SFAS 123R. The amounts for the year ended December 31, 2006 are included in the following table only to provide net income (loss) and net income (loss) per common share for a comparative presentation to the period of the previous year. The pro forma disclosure for the years ended December 31, 2004 and 2005 utilized the Black-Scholes option-pricing formula to estimate the value of the respective options with such value recognized as expense over the options’ vesting periods. Year Ended December 31, 2004 2005 2006 (In thousands, except per share amounts) Pro forma net income (loss) attributable to common stockholders: As reported ...... $3,705 $41,853 $(10,737) Add: Stock-based compensation included in reported net income (loss) attributable to common stockholders ...... 174 75 — Deduct: Stock-based compensation expense determined under fair value-based method for all awards ...... (4,382) (6,031) — Pro forma net (loss) income attributable to common stockholders . . $ (503) $35,897 $(10,737) Net income (loss) attributable to common stockholders per common share: Basic as reported ...... $ 0.23 $ 1.57 $ (0.39) Diluted as reported ...... $ 0.21 $ 1.47 $ (0.39) Basic — pro forma ...... $ (0.03) $ 1.34 $ (0.39) Diluted — pro forma ...... $ (0.03) $ 1.26 $ (0.39)
54 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted average fair value of the options at the date of grant during 2004, 2005 and 2006 was $6.88, $8.95 and $11.44, respectively. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for stock options granted during the years ended December 31, 2004, 2005 and 2006: Year Ended December 31, 2004 2005 2006 Dividend yield ...... 0% 0% 0% Expected volatility ...... 64.8% 47.4% 42.4% Average risk-free interest rate ...... 3.25% 4.00% 4.75% Expected term ...... 5.0years 5.0 years 4.9 years Forfeiture rate...... 10.0% 10.0% 15.0% Dividend yield — The Company has never declared or paid dividends on its common stock and does not anticipate paying dividends in the foreseeable future. Expected volatility — Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. Given the Company’s limited historical stock data following its initial public offering in June 2004, the Company has used a blended volatility to estimate its expected volatility. The blended volatility includes the average of the Company’s preceding one-year weekly historical volatility and the Company’s peer group preceding four-year weekly historical volatility. The Company’s peer group historical volatility includes the historical volatility of companies that are similar in revenue size, in the same industry or are competitors. Risk-free interest rate — This is the average U.S. Treasury rate (having a term that most closely approximates the expected life of the option) for the period in which the option was granted. Expected life of the options — This is the period of time that the options granted are expected to remain outstanding. This estimate is based primarily on historical exercise data. Options granted during the year ended December 31, 2006 have a maximum term of eight years. Forfeiture rate — This is the estimated percentage of options granted that are expected to be forfeited or cancelled on an annual basis before becoming fully vested. The Company estimates the forfeiture rate based on past turnover data. During the three months ended December 31, 2006, the Company adjusted its estimated forfeiture rate from approximately 10.0% to approximately 15.0% which resulted in a reduction of previously recorded compensation expense of approximately $475,000. The compensation cost that has been recognized in the consolidated statements of operations for the Company’s stock option plans for the year ended December 31, 2006 was approximately $8.1 million. The related total income tax benefit recognized in the consolidated statements of operations was approximately $3.3 million for the year ended December 31, 2006 and is classified as financing cash flows. For stock subject to graded vesting, the Company has utilized the “straight-line” method for allocating compensation cost by period. As of December 31, 2006, there was approximately $42.5 million of total unrecognized compensation cost related to unvested stock options granted under the Company’s stock option plans. The cost is expected to be recognized through February 2013 with a weighted average recognition period of approximately 3.4 years.
Basic and Diluted Net Income (loss) Attributable to Common Stockholders per Common Share Basic net income (loss) attributable to common stockholders per common share excludes dilution for potential common stock issuances and is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net
55 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) income (loss) attributable to common stockholders per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table provides a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) attributable to common stockholders per common share: Year Ended December 31, 2004 2005 2006 (In thousands, except share and per share amounts) Basic net income (loss) attributable to common stockholders per common share: Net income (loss) ...... $ 10,049 $ 41,853 $ (10,737) Less accretion on preferred stock and related dividends: Redeemable convertible preferred stock...... (6,344) — — Net income (loss) attributable to common stockholders per common share...... $ 3,705 $ 41,853 $ (10,737) Weighted average shares outstanding ...... 16,071,598 26,714,748 27,857,576 Basic net income (loss) attributable to common stockholders per common share ...... $ 0.23 $ 1.57 $ (0.39) Diluted net income (loss) attributable to common stockholders per common share: Net income (loss) attributable to common stockholders per common share...... $ 3,705 $ 41,853 $ (10,737) Weighted average number of basic shares outstanding ...... 16,071,598 26,714,748 27,857,576 Dilutive effect of: Stock options related to the purchase of common stock ...... 1,591,412 1,697,566 — Warrants related to the purchase of common stock.... 201,127 97,463 — Diluted shares outstanding ...... 17,864,137 28,509,777 27,857,576 Diluted net income (loss) attributable to common stockholders per common share ...... $ 0.21 $ 1.47 $ (0.39)
The dilutive effect of 1,131,263 options were not included in the computation of diluted loss per share for the year ended December 31, 2006 as their effect would be anti-dilutive.
Segment Information The Company currently operates in one business segment; namely the development, commercialization and implementation of software products and related services. The Company evaluates its market opportunities by referring to the U.S. postsecondary education market, U.S. elementary and secondary market, or K-12, education market, and the international postsecondary education market. The Company is not organized by market and is managed and operated as one business. A single management team that reports to the chief operating decision maker comprehensively manages the entire business. The Company does not operate any material separate lines of business or separate business entities with respect to its products or product development. Accordingly, the Company does not accumulate discrete financial information with respect to
56 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) separate product lines and does not have separately reportable segments as defined by SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information.” Substantially all of the Company’s material identifiable assets are located in the United States. Revenues derived from international sales were $16.8 million, $21.9 million and $34.7 million for the years ended December 31, 2004, 2005 and 2006, respectively. Substantially all international sales are denominated in U.S. dollars.
Recent Accounting Pronouncements In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income taxes — an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” It prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than- not recognition threshold should be measured as the largest amount of the tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 on its consolidated results of operations and financial condition. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. It clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 157 on its consolidated results of operations and financial condition.
Comprehensive Net Income (loss) Comprehensive net income (loss) includes net income (loss), combined with unrealized gains and losses not included in earnings and reflected as a separate component of stockholders’ equity. There were no differences between net income (loss) and comprehensive net income (loss) for the years ended December 31, 2004, 2005 and 2006.
3. WebCT, Inc. Merger On February 28, 2006, the Company completed its merger with WebCT pursuant to the Agreement and Plan of Merger dated as of October 12, 2005. Pursuant to the Agreement and Plan of Merger, the Company acquired all the outstanding common stock of WebCT in a cash transaction for approximately $178.3 million. The effective cash purchase price of WebCT before transaction costs was approximately $150.4 million, net of WebCT’s February 28, 2006 cash balance of approximately $27.9 million. The Company has included the financial results of WebCT in its consolidated financial statements beginning February 28, 2006. The merger was accounted for under the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations” (SFAS 141). Assets acquired and liabilities assumed were recorded at their fair values as of February 28, 2006. The total purchase price was $187.5 million, including the acquisition-related transaction costs of approximately $9.2 million. Acquisition-related transaction costs include investment banking, legal and accounting fees, and other external costs directly related to the merger.
Purchase Price Allocation Under the purchase method of accounting, the total estimated purchase price as shown in the table below was allocated to WebCT’s net tangible and intangible assets based on their estimated fair values as of
57 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
February 28, 2006. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill. The allocation of the purchase price was based upon a valuation and the Company’s estimates and assumptions are subject to change. The areas of the purchase price allocation that are not yet finalized relate primarily to income and non-income based taxes. In addition, upon the finalization of the combined company’s legal entity structure, additional adjustments to deferred taxes may be required. Based on independent third party valuations, and other factors as described above, the estimated purchase price was allocated as follows (in thousands):
Cash and cash equivalents ...... $ 27,880 Restricted cash ...... 1,452 Accounts receivable, net ...... 4,369 Prepaid expenses and other current assets ...... 1,356 Property and equipment, net ...... 1,720 Deferred tax assets, net...... 1,398 Accounts payable ...... (272) Other accrued liabilities ...... (10,687) Deferred revenues ...... (4,456) Net tangible assets to be acquired ...... 22,760 Definite-lived intangible assets acquired ...... 73,307 Goodwill ...... 91,392 Total estimated purchase price ...... $187,459
Of the total estimated purchase price, $22.8 million has been allocated to net tangible assets and $73.3 million has been allocated to definite-lived intangible assets acquired. Definite-lived intangible assets of $73.3 million consist of the value assigned to WebCT’s customer relationships of $39.6 million and developed and core technology of $33.7 million.
The value assigned to WebCT’s customer relationships was determined by discounting the estimated cash flows associated with the existing customers as of the acquisition date taking into consideration expected attrition of the existing customer base. The estimated cash flows were based on revenues for those existing customers net of operating expenses and net contributory asset charges associated with servicing those customers. The estimated revenues were based on revenue growth rates and customer renewal rates. Operating expenses were estimated based on the supporting infrastructure expected to sustain the assumed revenue growth rates. Net contributory asset charges were based on the estimated fair value of those assets that contribute to the generation of the estimated cash flows. A discount rate of 16% was deemed appropriate for valuing the existing customer base. The Company is amortizing the value of customer relationships proportion- ally to the respective discounted cash flows over an estimated useful life of five years. Customer relationships are not deductible for tax purposes.
Developed and core technology, which is comprised of products that have reached technological feasibility, includes products in WebCT’s product line. The value assigned to WebCT’s developed and core technology was determined by discounting the estimated future cash flows associated with the existing and core technologies to their present value. The revenue estimates used to value the developed and core technology were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors. The rates utilized to discount the net cash flows of developed and core technology to their present value were based on the risks associated with the respective cash flows taking into consideration the Company’s weighted average cost of capital. A discount rate of 16% was deemed appropriate for valuing developed and core
58 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) technology. The Company is amortizing the developed and core technology on a straight-line basis over an estimated useful life of three years. Developed and core technology are not deductible for tax purposes.
Of the total estimated purchase price, approximately $91.4 million has been allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for tax purposes.
As a result of the WebCT acquisition, the Company recorded net deferred tax assets of approximately $1.4 million in purchase accounting. This balance is comprised primarily of $37.0 million of deferred tax assets related to federal net operating losses, capitalized research and development, and certain amortization and depreciation expenses. The deferred tax assets are offset by $35.6 million in deferred tax liabilities resulting primarily from the related intangibles identified from the acquisition and the reduction in WebCT deferred revenues resulting from purchase accounting.
Deferred Revenues
In connection with the purchase price allocation, the estimated fair value of the support obligation assumed from WebCT in connection with the acquisition was determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to fulfilling the obligation plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that the Company would be required to pay a third party to assume the support obligation. The estimated costs to fulfill the support obligation were based on the historical direct costs related to providing the support services and to correct any errors in WebCT software products. These estimated costs did not include any costs associated with selling efforts or research and development or the related fulfillment margins on these costs. Profit associated with selling efforts is excluded because WebCT had concluded the selling effort on the support contracts prior to February 28, 2006. The estimated normal profit margin was determined to be 19%. As a result, in allocating the acquisition purchase price, the Company recorded an adjustment to reduce the carrying value of WebCT’s February 28, 2006 deferred support revenue by approximately $14.3 million to $4.5 million which represents the Company’s estimate of the fair value of the support obligation assumed. As former WebCT customers renew these support contracts, the Company will recognize revenue for the full value of the support contracts over the remaining term of the contracts, the majority of which are one year.
Pre-Acquisition Contingencies
The Company has currently not identified any material pre-acquisition contingencies where a liability is probable and the amount of the liability can be reasonably estimated. If information becomes available prior to the end of the purchase price allocation period, which would indicate that it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the purchase price allocation.
Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined results of operations of the Company and WebCT on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition and borrowings under the Company’s senior secured credit facilities with Credit Suisse, Cayman Islands Branch (Credit Suisse) (see Note 7) had taken place as of the beginning of each of the periods presented. The pro forma financial information for all periods presented also includes amortization expense from acquired intangible assets, adjustments to interest expense, interest income and related tax effects.
59 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The unaudited pro forma financial information for the year ended December 31, 2006 combines the historical results for the Company for the year ended December 31, 2006 and the historical results for WebCT for the period from January 1, 2006 to February 28, 2006. The unaudited pro forma financial information for the year ended December 31, 2005 combines the historical results for the Company for the year ended December 31, 2005 and the historical results for WebCT for the same period. 2005 2006 (In thousands, except per share amounts) (Unaudited) Total revenues ...... $182,963 $191,069 Net income (loss) ...... $ 25,332 $ (14,936) Basic net income (loss) per common share ...... $ 0.95 $ (0.54) Diluted net income (loss) per common share ...... $ 0.89 $ (0.54)
4. Inventories Inventories consist of the following: December 31, 2005 2006 (In thousands) Raw materials ...... $ 700 $ 799 Work-in-process ...... 451 658 Finished goods ...... 655 920 Total inventories ...... $1,806 $2,377
5. Property and Equipment Property and equipment consists of the following: December 31, 2005 2006 (In thousands) Computer and office equipment ...... $24,394 $ 32,108 Software ...... 11,347 14,914 Furniture and fixtures ...... 599 681 Leasehold improvements...... 1,866 2,304 38,206 50,007 Less accumulated depreciation and amortization ...... (28,266) (37,246) Total property and equipment, net ...... $ 9,940 $ 12,761
Depreciation and amortization expense for the years ended December 31, 2004, 2005 and 2006 was $6.3 million, $6.9 million and $9.0 million, respectively.
60 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Goodwill and Intangible Assets Goodwill and intangible assets consist of the following: December 31, 2005 2006 (In thousands) Goodwill ...... $10,252 $101,644 Acquired technology ...... $10,400 $ 44,107 Contracts and customer lists ...... 5,443 45,042 Non-compete agreements ...... 2,043 2,043 Trademarks and domain names...... 71 71 Patents and related costs ...... — 944 Subtotal...... 17,957 92,207 Less accumulated amortization ...... (17,397) (35,366) Intangible assets, net ...... $ 560 $ 56,841
Intangible assets from acquisitions are amortized over three to five years. Amortization expense related to intangible assets was approximately $3.5 million, $266,000 and $18.0 million for the years ended December 31, 2004, 2005 and 2006, respectively. Amortization expense related to intangible assets for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 is expected to be approximately $21.5 million, $19.9 million, $8.5 million, $5.3 million and $900,000, respectively.
7. Credit Facilities In connection with the acquisition of WebCT, the Company paid a portion of the purchase price using borrowings under a $70.0 million senior secured credit facilities agreement with Credit Suisse. The agreement provided for a $60.0 million senior secured term loan facility repayable over six years and a $10.0 million senior secured revolving credit facility due and payable in full at the end of five years. The interest rate on the facilities will accrue at one of the following rates selected by the Company: (a) adjusted LIBOR plus 2.25% or (b) an alternate base rate plus 1.25%. The alternate base rate is the higher of Credit Suisse’s prime rate and the federal funds effective rate plus 0.5%. If the Company chooses the adjusted LIBOR interest rate option, interest payments would be due on the last day of the interest period (one, two, three or six months) as selected by the Company. If the Company chooses the alternate base rate interest rate option, interest payments would be due on the last day of each calendar quarter. During March 2006, the Company chose the alternate base rate interest rate option. As of March 31, 2006, the Company changed to the adjusted LIBOR interest rate option. At December 31, 2006 the interest rate on the term loan facility was 7.57%. This interest rate does not reflect the impact of the amortization of debt issuance costs, discussed below, as interest expense. The Company repaid $10.0 million on the revolving credit facility on March 28, 2006. As of December 31, 2006, no amounts were outstanding on the revolving credit facility and $10.0 million in borrowings were available. The Company is required to pay a commitment fee, due at the end of each calendar quarter until the maturity date, equal to 0.5% on the average daily unused portion of the revolving credit facility as defined in the senior secured credit facilities agreement. The Company records this fee in interest expense. The senior secured credit facilities agreement allows for voluntary principal prepayments of principal and requires mandatory principal prepayments within 90 days after calendar year-end based on a calculation of excess cash flow as defined in the senior secured credit facilities agreement. The Company does not expect any mandatory principal prepayments within 90 days after year-end based on the calculation of excess cash flow as defined in the senior secured credit facilities agreement. The Company made scheduled principal
61 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) payments on the term loan facility of $150,000 which were due on the last day of each quarter from March 31, 2006 through December 31, 2006. A principal payment in the amount of $62,000 is due on the last day of each quarter from March 31, 2007 through December 31, 2010 with a $1.7 million principal payment each due on March 31, 2011 and June 30, 2011 and a $19.9 million payment due on September 30, 2011. The Company prepaid $10.0 million during each of August and December, 2006 and prepaid $5.0 million during each of September, October and November, 2006. As of December 31, 2006, the Company had $24.4 million outstanding on the term loan facility.
In connection with obtaining the senior secured credit facilities, the Company incurred $2.5 million in debt issuance costs. These costs, which are recorded as a debt discount, are netted against the remaining principal amount outstanding. The debt discount is being amortized as interest expense using the effective interest method over the term of the senior secured credit facilities and such amortization has been adjusted for any prepayments on the term loan facility. During the year ended December 31, 2006, the Company recognized approximately $1.2 million in additional interest expense associated with the acceleration in the amortization of the debt discount due to the prepayments of debt principal during 2006 totaling $35.0 million. During the year ended December 31, 2006, the Company recorded amortization expense of approximately $1.7 million as interest expense.
Under the terms of the senior secured credit facilities agreement, the credit facilities are guaranteed by all of the Company’s domestic subsidiaries and secured by perfected first priority security interests in, and mortgages on, substantially all of the Company’s tangible and intangible assets (including the capital stock of each specified subsidiary) and each of the Company’s subsidiaries. In addition, the facilities contain customary negative covenants applicable to the Company and its subsidiaries with respect to its operations and financial condition, such as a maximum quarterly capital expenditure amount, a maximum interest coverage ratio and a minimum leverage ratio.
8. Stockholders’ Equity
The Company completed its Initial Public Offering (IPO) of 6,325,000 shares of common stock on June 23, 2004, which included the underwriter’s over-allotment option exercise of 825,000 shares of common stock. Of the 6,325,000 shares of common stock sold in the IPO, 2,251,062 shares were sold by selling shareholders and 4,073,938 shares were sold by the Company, generating approximately $51.0 million in proceeds to the Company, net of offering expenses and underwriters discounts. Upon closing of the IPO, 13,371,980 shares of common stock were issued upon conversion of the Company’s preferred stock and 2,414,857 shares of common stock were issued in satisfaction of accrued dividends on the Company’s preferred stock.
Prior to the IPO, the Company issued shares of Series A, B, C, D and E convertible preferred stock (Series A, Series B, Series C, Series D and Series E, respectively). Each share of the Company’s preferred stock was convertible, at the option of the holder, into common stock at any time at a conversion ratio of 2.1189894-to-1, subject to adjustment for events such as a stock split, stock dividend or an issuance of stock. The holders of the Series A were entitled to receive, when and if declared by the Board of Directors, dividends at a rate of $0.05 per preferred share per annum issuable upon conversion of the Series A until dividends due to the holders of the Series B, C, D and E had been paid. The Series B, C and D accrued dividends at the rate of 8.0% per share per annum. The Series E accrued dividends, compounded quarterly, at the rate of 8.0% per annum of the original shareholder investment. These dividends were payable quarterly, when and if declared, and were equal to the total accrued and unpaid dividends prior to any dividend payments to the Series A, B, C or D. The holders of the Series B, C and D were entitled to receive quarterly dividend payments, when and if declared, equal to the total accrued and unpaid dividends prior to any dividend payments to the Series A.
62 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Each share of the Company’s preferred stock automatically converted into shares of common stock immediately prior to the closing of the Company’s IPO. At the time of the IPO, all accrued and unpaid dividends were paid-in-kind with shares of the Company’s common stock valued at the public offering price per share On April 23, 2004, the Company effected a one-for-two reverse stock split of all common stock outstanding. In addition, the Company increased the number of shares of authorized common stock to 40,000,000. On May 26, 2004, the Company effected a one-for-1.0594947 reverse stock split of all common stock outstanding. The accompanying consolidated financial statements give retroactive effect to the reverse stock splits for all periods presented. Upon consummation of the Company’s initial public offering, the Company adopted its Fourth Restated Certificate of Incorporation, which increased the number of shares of authorized common stock to 200,000,000.
9. Stock Option Plan In January 1998, the Company adopted a stock option plan in order to provide an incentive to eligible employees, consultants, directors and officers of the Company. As of December 31, 2006, 1,942,440 shares of common stock were reserved under the stock option plan. Shares of common stock available for distribution pursuant to stock options outstanding under the stock option plan were 1,565,931 as of December 31, 2006. Stock options granted under the stock option plan generally vest over a four-year period and have a ten year expiration period. Shares available for future grant as of December 31, 2006 were 376,509, however no future grants will be made under this plan. In March 2004, the Company adopted the 2004 Stock Incentive Plan in which the Company’s officers, employees, directors, outside consultants and advisors are eligible to receive grants under the plan. The plan expires February 2014. In June 2006, the Company’s stockholders approved an amendment to the Company’s Amended and Restated 2004 Stock Incentive Plan to increase the number of shares authorized for issuance under the 2004 Plan from 2,350,000 to 4,600,000. As of December 31, 2006, 4,407,746 shares of common stock were reserved under the stock option plan. Shares of common stock available for distribution pursuant to stock options outstanding under the stock option plan were 2,356,114 as of December 31, 2006. Stock options granted under the stock option plan generally vest over a three-year period and have a eight year expiration period. Shares available for future grant as of December 31, 2006 were 2,051,582.
63 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the status of the Company’s stock option plans is presented below for the years ended December 31, 2004, 2005 and 2006: Weighted-Average Shares Price/Share Options outstanding at December 31, 2003 ...... 3,493,091 $ 8.95 Options granted ...... 1,124,272 13.22 Options exercised ...... (397,033) 4.95 Options forfeited ...... (282,737) 11.68 Options outstanding at December 31, 2004 ...... 3,937,593 10.37 Options granted ...... 944,629 19.10 Options exercised ...... (1,320,728) 8.99 Options forfeited ...... (218,182) 14.92 Options outstanding at December 31, 2005 ...... 3,343,312 13.06 Options granted ...... 1,858,250 27.65 Options exercised ...... (768,863) 11.99 Options forfeited ...... (510,654) 24.16 Options outstanding at December 31, 2006 ...... 3,922,045 18.76 Options exercisable at December 31, 2006 ...... 1,810,267 11.85
For various price ranges, weighted average characteristics of outstanding and exercisable options as of December 31, 2006 were as follows: Outstanding Options Exercisable Options Weighted Average Weighted Weighted Remaining Life Average Average Range of Exercise Prices Shares (Years) Price Shares Price $0.02-$9.66...... 1,017,218 4.76 $ 8.51 994,157 $ 8.48 $9.67-$17.00 ...... 872,541 7.05 14.06 522,834 13.55 $17.01-$26.84 ...... 856,026 6.76 22.66 262,078 19.12 $26.85-$28.41 ...... 962,300 7.01 28.03 2,407 27.91 $28.42-$31.34 ...... 213,960 7.39 29.42 28,791 29.56 3,922,045 6.40 18.76 1,810,267 11.85
The aggregate intrinsic value of stock options outstanding as of December 31, 2006 was approximately $44.3 million. The aggregate intrinsic value of stock options exercisable as of December 31, 2006 was approximately $32.9 million. The aggregate intrinsic value of stock options exercised during the year ended December 31, 2006 was approximately $12.9 million.
10. Income Taxes For the year ended December 31, 2006, the Company recognized an income tax benefit totaling $4.6 million and an increase in additional paid-in-capital of $3.3 million related to tax deductions resulting from the exercise of stock options. The Company has elected to follow tax law in ordering of tax benefits to determine whether an excess tax benefit was realized under SFAS 123R. The Company does not have an established history of earnings related to its international net operating loss carryforwards and therefore international net operating loss carryforwards, including those acquired in the acquisition of WebCT, are fully reserved through a valuation allowance as of December 31, 2006. In addition, the Company has fully reserved
64 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) the state net operating loss carryforwards of WebCT because it has determined that it was not more likely than not that it would be able to generate sufficient taxable income to utilize those net operating loss carryforwards before they expire. Of the total income tax benefit recognized, approximately $1.6 million related to a Federal deferred tax benefit with the remainder representing a state deferred tax benefit.
The provision (benefit) for income taxes is comprised of the following:
December 31, 2004 2005 2006 (In thousands) Current expense...... $299 $ 490 $ 493 Deferred benefit ...... — (14,799) (5,075) Provision (benefit) for income taxes ...... $299 $(14,309) $(4,582)
Deferred income taxes (benefits) reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income taxes are as follows:
December 31, 2005 2006 (In thousands) Deferred tax assets (liabilities): Stock-based compensation expense ...... $ — $ 1,813 Net operating loss carryforwards ...... 8,755 34,996 International net operating loss carryforwards ...... 2,391 1,542 Alternative minimum tax and other tax credits ...... 2,568 2,749 Net operating loss attributable to stock option exercises ...... 7,498 9,663 Depreciation ...... 1,630 1,328 Amortization ...... 2,687 (13,136) Bad debts ...... 277 305 Deferred rent ...... 305 140 Deferred revenues ...... 967 1,350 Deferred cost of revenues ...... (1,772) (2,388) Other accruals and prepaids ...... (153) (458) Valuation allowance ...... (2,856) (5,147) Net deferred tax assets ...... $22,297 $ 32,757
As of December 31, 2006, the Company had net operating loss carryforwards for Federal and international income tax purposes of approximately $118.0 million. Approximately $79.4 million of this amount is restricted under Section 382 of the Internal Revenue Code. Section 382 of the Internal Revenue Code limits the utilization of net operating losses when ownership changes, as defined by that section, occur. The Company has performed an analysis of its Section 382 ownership changes and has determined that the utilization of certain of its net operating loss carryforwards may be limited. Utilization of the net operating loss carryforwards subject to Section 382 will be limited to approximately $8.1 million per year. Net operating loss carryforwards will expire, if unused, by the end of 2018-2026. Due to the length of time available to fully utilize the net operating loss carryforwards and the likelihood of having sufficient taxable income in those periods, the Company believes it is more likely than not that these assets will be realized.
65 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision (benefit) for income taxes differs from the amount of taxes determined by applying the U.S. federal statutory rate to (loss) income before provision (benefit) for income taxes as a result of the following for the year ended December 31: 2004 2005 2006 Federal tax at statutory rates ...... 34.0% 35.0% 35.0% State taxes, net of federal benefit ...... 4.6 4.5 4.5 Change in valuation allowance ...... (24.5) (87.7) 4.6 Permanent differences ...... (11.2) (3.7) (9.1) Change in tax rates...... — — (1.3) Other ...... — — (3.8) (Benefit) provision for income taxes ...... 2.9% (51.9)% (29.9)%
The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of the Company’s business, there are transactions and calculations where the ultimate tax determination is uncertain. Accruals for tax contingencies are provided for in accordance with the requirements of SFAS No. 5, “Accounting for Contingencies.” Although the Company believes it has appropriate support for the positions taken on its tax returns, the Company has recorded a liability for its best estimate of the probable loss on certain of these positions. The Company believes that its accruals for tax liabilities are adequate, based on its assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter, which matters result primarily from intercompany transfer pricing and the amount of research and experimentation tax credits claimed. Although the Company believes its recorded assets and liabilities are reasonable, tax regulations are subject to interpretation and tax litigation is inherently uncertain; therefore the Company’s assessments can involve both a series of complex judgments about future events and rely heavily on estimates and assumptions. Although the Company believes that the estimates and assumptions supporting its assessments are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and recorded assets and liabilities. Based on the results of an audit or litigation, there could be a material effect on the Company’s income tax provision, net income or cash flows in the period or periods for which that determination is made. As of December 31, 2005 and 2006, the Company had a tax contingencies accrual of approximately $500,000 and $1.0 million, respectively, that is recorded in accrued expenses on the consolidated balance sheets.
11. Commitments and Contingencies Total rent expense recorded for the years ended December 31, 2004, 2005 and 2006 was $3.2 million, $3.5 million and $4.7 million, respectively. Total sublease income recorded for the years ended December 31, 2004, 2005 and 2006 was $226,000, $218,000 and $274,000, respectively.
66 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2006, minimum future payments under existing credit facilities and noncancelable operating leases and rental income from subleases are as follows for the years below: Credit Operating Sub-Lease Facilities Leases Income (In thousands) 2007 ...... $ 246 $ 4,312 $230 2008 ...... 246 5,057 — 2009 ...... 246 5,133 — 2010 ...... 246 5,510 — 2011 ...... 23,416 5,525 — 2012 and beyond ...... — 35,409 — Total ...... $24,400 $60,946 $230
On December 15, 2006, the Company entered into an agreement with Washington Television Center, LLC pursuant to which the Company will lease approximately 111,895 square feet of office space in the building known as 650 Massachusetts Avenue, Washington, D.C. The Company will be relocating its corporate headquarters to the leased premises. The lease term commences on the later of (i) eight months from the date on which the landlord delivers the leased premises to the Company and (ii) the date on which the Company occupies the leased premises. The delivery date of the leased premises is anticipated to be June 2007 and the Company anticipates that it will occupy the leased premises in late 2007 or early 2008 The base annual rent will initially be $45.75 per rentable square foot and will increase on each anniversary by 2%, except on the fifth anniversary on which it will increase by $1.50 per square foot. The rent for the first four months of the first lease year and the first two months of the second lease year will be abated. The Company, from time to time, is subject to litigation relating to matters in the ordinary course of business. The Company believes that any ultimate liability resulting from these contingencies will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.
12. Employee Benefit Plans In 1999, the Company adopted a 401(k) plan covering all employees of the Company who have met certain eligibility requirements. Under the terms of the 401(k) plan, the employees may elect to make tax- deferred contributions to the 401(k) plan. In addition, the Company may match employee contributions, as determined by the Board of Directors and may make discretionary contributions to the 401(k) plan. No matching or discretionary contributions have been made to the 401(k) plan prior to 2006. The Board of Directors approved a matching contribution to the 401(k) plan to be paid in a lump-sum to those participating employee accounts in February 2007, which will be approximately $750,000. The matching contribution will be equal to 33% of a participant’s 2006 contributions, up to 6% of the participant’s salary and IRS limits. Only those participants that have one year of service and are employed by the Company as of December 31, 2006 are eligible for the matching contribution. The matching contributions will vest over a three year graded vesting schedule. All contributions made by employees under the 401(k) plan vest immediately in the participant’s account.
13. Quarterly Financial Information (Unaudited) The Company’s quarterly operating results normally fluctuate as a result of seasonal variations in its business, principally due to the timing of client budget cycles and student attendance at client facilities. Historically, the Company has had lower new sales in its first and fourth quarters than in the remainder of the
67 BLACKBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) year. The Company’s expenses, however, do not vary significantly with these changes and, as a result, such expenses do not fluctuate significantly on a quarterly basis. Historically, the Company has performed a disproportionate amount of its professional services, which are recognized as incurred, in its second and third quarters each year. The Company expects quarterly fluctuations in operating results to continue as a result of the uneven seasonal demand for its licenses and services offerings. March 31, June 30, September 30, December 31, 2005 2005 2005 2005 (In thousands, except per share amounts) Summary consolidated statement of operations: Total revenues ...... $30,942 $33,049 $35,927 $35,746 Costs of revenues ...... 9,430 9,647 10,240 10,510 Net income attributable to common stockholders...... 5,410 6,063 7,269 23,111 Net income attributable to common stockholders per common share: Basic ...... $ 0.21 $ 0.23 $ 0.27 $ 0.85 Diluted ...... $ 0.20 $ 0.21 $ 0.25 $ 0.79 The Company, for the first time in its history, generated cumulative earnings from operations for the three-year period ended December 31, 2005. As a result of this positive earnings trend and projected operating results in the foreseeable future, the Company determined that it was more likely than not that it would be able to generate sufficient taxable income to utilize its net operating loss carryforwards, and accordingly, reduced its deferred tax asset valuation allowance by approximately $31.6 million. This reduction resulted in the recognition of an income tax benefit of $14.8 million for the quarter ended December 31, 2005. March 31, June 30, September 30, December 31, 2006 2006 2006 2006 (In thousands, except per share amounts) Summary consolidated statement of operations: Total revenues ...... $37,708 $43,580 $50,354 $51,421 Costs of revenues ...... 11,357 14,312 15,739 14,187 Net income (loss) attributable to common stockholders...... 148 (6,311) (4,775) 201 Net income (loss) attributable to common stockholders per common share: Basic ...... $ 0.01 $ (0.23) $ (0.17) $ 0.01 Diluted ...... $ 0.01 $ (0.23) $ (0.17) $ 0.01 During the three months ended December 31, 2006, the Company adjusted its estimated forfeiture rate from approximately 10.0% to approximately 15.0% which resulted in a reduction of previously recorded compensation expense of approximately $475,000.
68 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.
Item 9A. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2006. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2006, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes in Internal Control over Financial Reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
69 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). There are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Ernst & Young LLP, independent registered public accounting firm, as stated in their report which is included herein. Signature Title Date
/s/ Michael L. Chasen Chief Executive Officer and Director February 23, 2007 Michael L. Chasen (Principal Executive Officer)
/s/ Michael J. Beach Chief Financial Officer February 23, 2007 Michael J. Beach (Principal Financial Officer)
70 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders Blackboard Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Blackboard Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Blackboard Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expendi- tures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Blackboard Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Blackboard Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Blackboard Inc. as of December 31, 2005 and 2006, and the related consolidated statements of income, stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2006 of Blackboard Inc. and our report dated February 20, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia February 20, 2007
71 Item 9B. Other Information.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information regarding our executive officers required by this Item is set forth under Item 1 to this annual report.
The following information will be included in our Proxy Statement to be filed within 120 days after the fiscal year end of December 31, 2006, and is incorporated herein by reference:
• Information regarding our directors required by this Item is set forth under the heading “Election of Directors”
• Information regarding our audit committee and designated “audit committee financial experts” is set forth under the heading “Corporate Governance Principles and Board Matters, Board Structure and Committee Composition — Audit Committee”
• Information regarding Section 16(a) beneficial ownership reporting compliance is set forth under the heading “Section 16(a) Beneficial Ownership Reporting Compliance”
Code of Ethics
We have adopted a code of ethics and business conduct that applies to our employees including our principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions. Our code of ethics and business conduct can be found posted in the investor relations section on our website at http://investor.blackboard.com.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the information provided under the heading “Executive Compensation” of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to the information provided under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to the information provided under the heading “Certain Relationships and Related Transactions” of the Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to the information provided under the heading “Principal Accounting Fees and Services” of the Proxy Statement.
72 PART IV
Item 15. Exhibits, Financial Statement Schedules. (a) 1. Financial Statements. The consolidated financial statements are listed under Item 8 of this report. 2. Financial Statement Schedules. Schedule II — Valuation and Qualifying Accounts Other financial statement schedules as of December 31, 2005 and 2006, and for each of the three years in the period ended December 31, 2006 have been omitted since they are either not required, not applicable or the information is otherwise included in the consolidated financial statements or the notes to consolidated financial statements. 3. Exhibits. The Exhibits filed as part of this Annual Report on Form 10-K are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated herein by reference. (b) Exhibits — see Item 15(a)(3) above. (c) Financial Statement Schedules — see Item 15(a)(2) above.
73 BLACKBOARD INC. SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
As of December 31, 2004 2005 2006 (In thousands) Allowance for Doubtful Accounts Beginning Balance ...... $1,018 $ 954 $ 701 Additions ...... 140 (1,250) 198 Reductions ...... (515) (318) (132) Other(1) ...... 311 1,315 — Ending Balance ...... $ 954 $ 701 $767
(1) The years ended December 31, 2004 and 2005 include the reinstatement and subsequent collections on accounts receivable that were deemed uncollectible in prior periods.
74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 23rd day of February 2007.
BLACKBOARD INC.
By: /s/ Michael J. Beach Michael J. Beach Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date
/s/ Michael L. Chasen Chief Executive Officer and Director February 23, 2007 Michael L. Chasen (Principal Executive Officer)
/s/ Michael J. Beach Chief Financial Officer February 23, 2007 Michael J. Beach (Principal Financial Officer)
/s/ Jonathan R. Walsh Vice President, Finance and Accounting February 23, 2007 Jonathan R. Walsh (Principal Accounting Officer)
/s/ Matthew Pittinsky Chairman of the Board of Directors February 23, 2007 Matthew Pittinsky
/s/ Frank R. Gatti Director February 23, 2007 Frank R. Gatti
/s/ Arthur E. Levine Director February 23, 2007 Arthur E. Levine
/s/ E. Rogers Novak, Jr. Director February 23, 2007 E. Rogers Novak, Jr.
/s/ William Raduchel Director February 23, 2007 William Raduchel
75 EXHIBIT INDEX Exhibit Number 2.1 Agreement and Plan of Merger, dated October 12, 2005, by and among the Registrant, WebCT, Inc. and College Acquisition Sub, Inc.(9) 3.1 Fourth Restated Certificate of Incorporation of the Registrant(4) 3.2 Amended and Restated By-Laws of the Registrant(4) 4.1 Form of certificate representing the shares of the Registrant’s common stock(3) 10.1 Amended and Restated Stock Incentive Plan, as amended(1) 10.2 Amended and Restated 2004 Stock Incentive Plan(13) 10.3 Employment Agreement between the Registrant and Michael Chasen dated November 14, 2005(10) 10.4 Employment Agreement between the Registrant and Matthew Pittinsky dated November 14, 2005(10) 10.5 Employment Agreement between the Registrant and Michael Beach, dated September 1, 2006(14) 10.6 Employment Agreement between the Registrant and Matthew H. Small, dated January 26, 2004(7) 10.7 Employment Agreement between the Registrant and David Sample, dated June 3, 2006 ‡ 10.8 Employment Agreement between the Registrant and Peter Q. Repetti, dated June 1, 2001(2) 10.9 Outside Director Compensation Plan(15) 10.10 Office lease between the Registrant and 1899 L Street LLC, dated November 22, 1999, as amended(1) 10.11 Fifth Amendment to Lease Agreement between the Registrant and 1899 L Street Tower LLC, dated August 31, 2005(11) 10.12 Lease Commencement Agreement between the Registrant and 1899 L Street Tower LLC, dated August 31, 2005(11) 10.13 Sixth Amendment to Lease Agreement between the Registrant and 1899 L Street Tower LLC, dated January 27, 2006(11) 10.14 Seventh Amendment to Lease Agreement between the Registrant and 1899 L Street Tower LLC, dated November 3, 2006 ‡ 10.15 Eighth Amendment to Lease Agreement between the Registrant and L Street Tower LLC dated February 21, 2007 ‡ 10.16 Office Lease Agreement between the Registrant and Washington Television Center, dated December 15, 2006 ‡ 10.17 Third Amended and Restated Registration Rights Agreement, between the Registrant and certain stockholders of the Registrant dated as of April 6, 2001(1) 10.18 Registration Rights Agreement, between the Registrant and The George Washington University, dated January 11, 2002(3) 10.19 Form of Incentive Stock Option Agreement(5) 10.20 Form of Nonstatutory Stock Option Agreement(5) 10.21 Form of Restricted Stock Agreement(5) 10.22 Form of Executive Incentive Stock Option Agreement(6) 10.23 Form of Executive Nonstatutory Stock Option Agreement(6) 10.24 Form of Executive Nonstatutory Stock Option Agreement(15) 10.25 Form of Executive Nonstatutory Stock Option Agreement(15) 10.26 Summary of Approved 2006 and 2007 Compensation(15) 10.27 Guarantee and Collateral Agreement, dated February 28, 2006 by and among the Registrant, certain subsidiaries of Registrant and Credit Suisse, Cayman Islands Branch.(12) 10.28 $70,000,000 Credit Agreement, dated February 28, 2006 by and between the Registrant, Credit Suisse, Cayman Islands Branch, Credit Suisse and certain lenders thereto.(12) 10.29 Escrow Agreement, dated February 28, 2006 by and between the Registrant, American Stock Transfer & Trust Company, Dennis Beckingham and Marc Poirier.(12) 21.1 Subsidiaries of the Company ‡ Exhibit Number 23.1 Consent of Ernst & Young LLP ‡ 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ‡ 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ‡ 32.1 Section 906 Principal Executive Officer Certification † 32.2 Section 906 Principal Financial Officer Certification †
‡ Filed herewith. † Furnished herewith. (1) Previously filed on March 5, 2004 as an exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-113332), and incorporated by reference herein. (2) Previously filed on April 7, 2004 as an exhibit to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-113332), and incorporated by reference herein. (3) Previously filed on May 4, 2004 as an exhibit to Amendment No. 2 to the Registrant’s Registration State- ment on Form S-1 (File No. 333-113332), and incorporated by reference herein. (4) Previously filed on August 8, 2004 as an exhibit to the Registrant’s Report on Form 10-Q, and incorpo- rated by reference herein. (5) Previously filed on December 3, 2004 as an exhibit to the Registrant’s Report on Form 8-K, and incorpo- rated by reference herein. (6) Previously filed on March 1, 2005 as an exhibit to the Registrant’s Report on Form 10-K, and incorpo- rated by reference herein. (7) Previously filed on May 13, 2005 as an exhibit to the Registrant’s Report on Form 10-Q, and incorpo- rated by reference herein. (8) Previously filed on May 25, 2005 as an exhibit to the Registrant’s Report on Form 8-K, and incorporated by reference herein. (9) Previously filed on October 12, 2005 as an exhibit to the Registrant’s Report on Form 8-K, and incorpo- rated by reference herein. (10) Previously filed on November 18, 2005 as an exhibit to the Registrant’s Report on Form 8-K, and incor- porated by reference herein. (11) Previously filed on February 15, 2006 as an exhibit to the Registrant’s Report on Form 10-K, and incor- porated by reference herein. (12) Previously filed on May 10, 2006 as an exhibit to the Registrant’s Report on Form 10-Q, and incorpo- rated by reference herein. (13) Previously filed on August 9, 2006 as an exhibit to the Registrant’s Report on Form 10-Q, and incorpo- rated by reference herein. (14) Previously filed on November 9, 2006 as an exhibit to the Registrant’s Report on Form 10-Q, and incor- porated by reference herein. (15) Previously filed on February 6, 2007 as an exhibit to the Registrant’s Report on Form 8-K, and incorpo- rated by reference herein. 47856_UBS_FWP 4/10/07 2:00 PM Page 10
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[This Page Intentionally Left Blank] BOARD OF DIRECTORS CORPORATE HEADQUARTERS
Matthew L. Pittinsky Blackboard Inc. Chairman of the Board 1899 L Street, NW, 11th Floor Blackboard Inc. Washington, DC 20036
Michael L. Chasen Chief Executive Officer and President INVESTOR MATERIALS Blackboard Inc. For further information about Blackboard, additional copies of this Frank R. Gatti report, Form 10-K, or other financial literature contact: Chief Financial Officer Educational Testing Services Michael J. Stanton Vice President, Investor Relations & Global Treasury Arthur E. Levine Blackboard Inc. President 1899 L Street, NW, 11th Floor Woodrow Wilson National Fellowship Foundation Washington, DC 20036 (202) 463-4860 E. Rogers Novak, Jr. [email protected] Managing Member Novak Biddle Venture Partners You may also learn more about Blackboard by visiting the Investor Center on our website at investor.blackboard.com William Raduchel LEGAL COUNSEL
CORPORATE OFFICERS Wilmer Cutler Pickering Hale and Dorr LLP Washington, DC Matthew L. Pittinsky Chairman of the Board INDEPENDENT REGISTERED Michael L. Chasen Chief Executive Officer and President PUBLIC ACCOUNTING FIRM
Michael J. Beach Ernst & Young, LLP Chief Financial Officer and Treasurer McLean, VA Matthew H. Small TRANSFER AGENT AND REGISTRAR Chief Legal Officer and Secretary American Stock Transfer & Trust Company Peter Segall 59 Maiden Lane President, North America Higher Education & Operations New York, NY 10038 (718) 921-8200 David Sample (800) 937-5449 Senior Vice President, Sales www.amstock.com Jonathan R. Walsh Vice President, Finance and Accounting STOCK LISTING
Blackboard’s common stock is traded on the NASDAQ Stock Market under the symbol “BBBB.” NOTICE OF ANNUAL MEETING
The Westin Grand 2350 M Street, NW Washington, DC 20037 June 7, 2007 11 a.m. (EST)
78151_cvr.indd 4 4/30/07 12:56:12 PM Blackboard Inc. 1899 L Street, NW, 11th Floor Washington, DC 20036 Phone: 202.463.4860 Fax: 202.463.4863
78151_cvr.indd 2 4/30/07 12:56:10 PM